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5 ways to get your credit score out of the dumps

Jeanie Ahn
Senior Producer/Reporter

A low credit score can make it difficult for you to get a good deal on home, car or student loan, and can even keep you from your dream job. So on this week’s episode of The Payoff I’ll walk you through how you can improve your score.

#1 Pay your bills on time

When a payment is over 30 days late, credit bureaus are notified and your score drops significantly. In fact, 35% of your FICO score is based on your payment history — making it the most influential factor determining your score.

One late credit card payment could drop your score by 100 points — pretty significant for a 30-day delinquency. If you find yourself in this situation, it’s worth asking the credit card company to take it off your report as a one-time courtesy also known as a “goodwill deletion.”

If it’s more than 90 days late, it’s unlikely creditors will work with you. “Ninety days crosses the threshold between ‘minor’ derogatories and ‘major’ derogatories, making it more problematic for your credit score,” says John Ulzheimer, president of The Ulzheimer Group.

#2 Negotiate a deal with debt collectors

For an outstanding payment over 180 days, or 6 months, banks or other creditors like medical offices will start handing over your debt to a collection agency. The good news is that you typically have 30 days before the collection agency reports the debt. But once it lands on your report, it drops your score in lower and remains that way for 7 years.

“If you have something in collection, the worst thing you can do is to avoid the calls from the debt collector,” says Ulzheimer. Instead, he says to negotiate the debt and get the settlement in writing. Some agencies will offer a “pay for delete” deal once you’ve paid the settled amount. But Ulzheimer says that while the debt collector may agree to delete it, the credit reporting bureaus might not honor the request because it’s not a recognized process.

#3 Don’t use more than 30% of your available credit

Don’t max out your credit cards – a high balance makes you look riskier to lenders. Pay attention to your credit utilization ratio, or the percentage of available credit you’re using. An optimal debt to credit ratio is less than 10%, but keeping it around 15% to 25% is fine, too. The standard rule is not to go over 30% of your available credit. To make sure you stay under that, check your balances regularly or set up an alert.

If your credit score is suffering because you’re using more than 30% of your available credit, Ulzheimer says one smart way to boost your score is to open up another credit card. That way, you’re upping your credit limit and lowering your debt-to-credit ratio. But make sure you don’t also ramp up charges with the new card — which would defeat the purpose of opening a new line of credit to boost your utilization ratio.

#4 Know the difference between a hard and soft inquiry

A hard inquiry will show up on your credit report when you’ve apply for things like a new credit card, a mortgage, or an auto loan. Basically it means a lender is checking your credit — and to be able to do that, it requires your authorization.

It’s not the worst thing in the world to have 1 to 3 hard inquiries on your report. But too many hard inquiries can make you look a little desperate to lenders. Compared to a late payment that can lower your score by 100 points, one hard inquiry can lower your score by just 5 to 10 points. The length of time a hard inquiry can impact your score is 3 to 12 months.

You’ll never be denied a loan based on hard inquiries alone. “But if you’ve applied for a loan, and the lender is unsure about your application, they can look to your hard inquiries as the last factor in their decision making process to ‘break the tie’,” says Josiah Nelson, founder of ReadySettle, a credit negotiation group.

On your credit report, if there’s a hard inquiry listed that you haven’t authorized, report it to the credit reporting agencies so they can investigate and remove the inquiry if it’s found to be unauthorized.

Soft inquiries are also credit checks, but don’t affect your credit score and don’t require your permission. These take place when credit card companies check your credit before they mail you preapproved credit offers, when a potential employer is conducting your background check, or when you’re checking on your own credit.

#5 Monitor your financial health

All in all, the best way to monitor your financial health and protect against identity theft is to check your own credit report regularly. You’ll be able to catch errors — whether your own or by others — and address them as soon as possible so that you can be on your way to a better credit score.

Go to annualcreditreport.com and get a free credit report by each of the 3 credit bureaus every year. It’s a good idea to get all three because some lenders might only report to 1 or 2 of the bureaus.

Have any more questions on credit? Email us or share with us in the comments below.

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