The changes Fair Isaac announced Thursday to how it calculates its widely-used FICO credit scores could help boost scores for the millions of Americans with medical debt collections as well as those with a settled debt collection lingering on their report, but there is a lot we can also do to help raise those scores even further.
“While these changes, if adopted by lenders, can be helpful to consumers, it’s not a cure to all their credit problems,” warns John Ulzheimer, president of consumer education at CreditSesame.com and a former Fair Isaac manager.
If your rating is south of 700, these good behaviors will be well worth it when the price you’ll pay to borrow drops.
1) Check Your Credit Reports
Fixing errors in your credit report can give you the most immediate score boost. Request a copy of all three of your credit reports from each credit agency for free from annualcreditreport.com. “You need to be very proactive and check your reports and make sure anything that is incorrect is cleared,” says Keith Gumbinger, vice president of HSH.com, a website that tracks the mortgage and consumer loan industry.
If you spot a mistake like a paid-off debt appearing as unpaid, contact the lender or creditor that reported the inaccurate information and ask them to update your account. Each credit bureau also has a form on their website for submitting disputes. For a more serious issue, file a dispute with the creditors and the credit bureau, as well as the Consumer Finance Protection Bureau (CFPB).
2) Pay Your Bills on Time
The biggest influence on your credit score is your payment history. Whether you’ve made your loan payments and done so on time will rise or lower your score more than any other single factor. “There is nothing magic to improving your score, you’ve just got to diligent about paying on time,” says Gumbinger.
The best thing you can do is set up automatic payments for the minimum amounts on your debts to make sure you’re never overdue. If automatic bill pay isn’t an option or you’d prefer to push the bill out yourself, you can also set up bill alerts through your card’s website or reminders on your phone. By consistently meeting your payment deadlines, you will see your score start to increase after about six months.
3) Keep Balances Low
Just because your credit limit tops out at, say, $10,000, you should not spend anywhere near that. The amount of credit you use as a percentage of the amount available is called your “utilization ratio,” and it’s the second largest element determining your credit score. “Lenders like to see a significant difference between your balance and the card’s maximum balance,” says Jack M. Guttentag, a finance professor at the University of Pennsylvania’s Wharton School and founder of The Mortgage Professor website.
Look at your most recent statement to find your credit max and then limit yourself to charging up to only 30% of that amount. If you can limit yourself to the single digits that’s even better, as consumers with the best credit scores use just 7% of their revolving credit lines, according to FICO. Make sure you’re doing this with every card, as creditors will also compare the total amount you owe with the sum of your credit limits on all cards.
4) Settle With Debt Collectors
While it’s always in your best interest to resolve outstanding debts as soon as possible, the new FICO credit model makes this even more worthwhile. Under the new FICO credit-score model any record of you failing to pay a bill will not be factored into their calculations if the bill has been paid or settled with a collection agency. Before this any bill reported to collection, even if settled, would still have dinged your score.
As before, any unpaid bills will still be noted on your credit report for lenders to see. So if you have any lingering debts you’ve put off dealing with, reach out to the agency and work out a payment plan to keep this blemish from dragging your score down. For more strategies for dealing with collection agencies, see 9 Ways to Outsmart Debt Collectors.
5) Build Up Credit History
To prove to lenders that you are not risky and build up your credit score, you will need to build credit history. “You can’t improve your score if you never have debts,” says Guttentag. To create a good credit history, you’ll need to have open lines of credit that you use and pay off responsibly each month. While you may want to open a new line of credit occasionally, be careful not to open too many new accounts at once as this is seen as risky behavior. Watch out for retail credit card signups as well as these will take a bigger bite out of your score then signing up for a traditional credit card will.
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