Improving Your Credit Score for Dummies

April 4th, 2007.

Anyone who has been reading my site for awhile knows the story of how I maxed out 11 credit cards and what I had to do to pay them off. However, what I haven’t mentioned was what I did to improve my credit score.

Back then, I thought paying your bills was all it took to turn your credit around. So you can imagine my surprise when, after a full year of being debt free, my credit score was still a whopping 498. If you know anything about credit scores, you know that a score of 498 is off the charts bad. It’s white trash bad. It’s don’t even bother applying for a loan because they’re just going to laugh at you bad.

I just didn’t understand it. I had paid the bills! I canceled all of my credit cards! Why wasn’t my credit improving?

Personally, I think the biggest tragedy of the public school system is that there are barely any required classes in place that explain responsible credit maintenance to students. You’ve got home economics classes that teach you how to scramble eggs and you’ve got shop classes that teach you how to make your very own golf tees. But no one ever sits you down and tells you the ins and outs of credit and how it affects your life. I think that’s bullshit. After all, no one ever ruined their life by not knowing how to make a decorative pillow.

Anyway, I figured I’d do my part to help out by explaining how I improved my credit score. Please keep in mind that credit laws vary from state to state and although this worked for me, it may not work as well for you. As always, do your own research.

Downsize Your Life

Chances are the reason you got into credit trouble in the first place was because you were living outside of your means. If you are sincere about improving your finances, you’ll re-calculate your budget and switch to a lifestyle you can comfortably afford. This could mean driving a used car as opposed to a new one or moving into a smaller house or apartment. This may not sound all that appealing at first, but trust me the peace of mind that one obtains when they are in a position to comfortably pay all their bills with enough left over to save is by far more valuable than anything you could possibly buy.

Be Aggressive

If you just sit around waiting for your credit score to magically improve on its own, you’re going to be waiting a hell of a long time. The very first thing you need to do is order a copy of your credit report from the 3 major bureaus: Equifax, Trans union, and Experian. You can obtain reports from all of them online for a small fee. You can also get the report for free if you write to them directly. If it were me, I’d just lick a stamp and save myself $40.

Prioritize

If you’re anything like me, you’ll read your report and think to yourself, “I didn’t know that would get reported to the credit bureau!” I was literally floored when I realized that the CD club I joined years ago and forgot about counted as a negative against me. Things might seem a little overwhelming at first, but if you organize your negatives into 3 groups it gets easier.

I put my mortgage, my car payment, my student loans, and my credit cards in my highest priority group. The reason for this is because these things get updated on your report monthly and keeping them current benefits your credit the most. Also, these loans are usually long term, so a negative mark will stick with you longer.

Miscellaneous bills like car insurance, utility bills, cell phone bills, and that gym membership only show up on your credit when you fuck up, so I put them in my medium priority group. However, just because they are not high priority doesn’t mean you should ignore them. A lender might look at your report and say, “Wow, this person has trouble paying his late fees at Blockbuster, so how can I feel comfortable extending him a mortgage?” You don’t want a lender thinking that about you unless you enjoy paying ridiculous amounts of interest.

Lowest priority bills on your credit report should be medical bills. Don’t get me wrong, you should still try your best to keep on top of them. But lenders are a bit more forgiving of your knee surgery than they are of your maxed out Dillard’s card.

Only Keep 2 Credit Cards Active, 3 Tops

If you have a credit card for every goddamn store you’ve ever been in, it’s time to pick up the phone and start canceling. Regardless of the balances on your cards, no one is going to look favorably on you opening multiple revolving credit lines. It is not a positive sign that many people trust you. Instead, it is a negative sign because you have plenty of opportunities to fuck up.

Ideally, you should only have two major credit cards. If you visit a department store regularly, feel free to have a third store card. Axe the rest. Also, be sure you axe the newest accounts opened first considering that the positives of owning a card for a long period of time are significant.

Don’t Snub Your Nose at a Secure Card

I made the mistake of panicking and canceling all of my credit cards. After that, my credit was in the shitter and since no one would take a chance on me, I was left with very little recourse when it came time to establish new (positive) credit.

At first, I snubbed my nose at a secure credit card. I thought to myself, “It’s downright stupid to pay interest on my own money.”

However, if you pay your bill in full every month (which I highly recommend), the interest issue is pretty much moot. Most credit cards only start charging you interest if you hold the debt over 30 days. Since you have followed my advice to the T and downsized your lifestyle, you should never have to do that considering that you can now afford to pay all of your bills in full every month comfortably.

I actually obtained a secure credit card and put a really small monthly bill on it. Then, I cut it up. Since my bill was never more than $15, I could easily pay it. Not only that, I was improving my credit and paying a utility at the same time. Two birds with one stone, baby.

Never Charge More Then Half of Your Limit

It doesn’t matter if your credit card only sports a $100 limit, never charge more then $50. Credit bureaus and lenders alike don’t like to see you teetering on the edge disaster and that is exactly what they will perceive is happening if you take full advantage of all the credit available to you. Every time you get even somewhat close to maxing out a credit card, your credit score will take a significant dip. Resist the urge to charge over 50% of your limit at all times.

Don’t Waste Time Paying Off the Extremely Old Bills

Now of all the advice I’ve given, this one should be the most thoroughly researched before put into practice. But sometimes, paying off an extremely old bill (Think more than 5 years old) does more harm to your credit than good.

For one thing, paying a bill doesn’t make a bad mark good. For another thing, it may be eventually falling off of your credit report anyway. Of course, the time it takes for something to fall off your credit report varies by the state you live in and exactly what kind of credit it was in the first place.

For example, an old gas bill might just naturally fall off your credit in 3 years….whether you paid the bill or not. But a tax lien will stay on your credit for-fucking-EVER if you don’t pay the bill.

Also, paying a bill that was just about to fall off your credit anyway may reset the clock. By that I mean you might have had a bill that was 6 and a half years old. If you leave it alone, it is due to fall off your report in 6 more months. However, if you pay the bill, they may just reset the clock and that negative mark may be stuck there for another 7 years. If that is the case, it’s best to ignore it and save some time and money in the process.

Keep in mind that even calling to inquire about an old bill may reset the clock, so be very, very careful to check the dates on old bills and compare them with your state laws before you make a phone call to the collection agency.

Never Underestimate the Power of Good Credit

Good credit opens doors and saves you thousands of dollars in interest. Not only that, but a few minor mistakes made in college can potentially haunt you for years. The best thing you can possibly do is learn responsible credit maintenance as early as possible.

But if you’ve already fucked up, do not just ignore the problem until it goes away. I know it can seem intimidating at first, but the quicker you get on the ball, the better your chances are at making drastic improvements to your score. For example, my 498 credit score became a less shameful score of 630 within one year. Being aggressive will pay off if you stick with it.

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