Step 1: Household Finances
The one thing most people know but don't want to hear! There’s no way around this guys & gals. You can’t build your credit up if you’re continually breaking it down. So, paying your bills on time is something you must do... but just paying your bills isn’t going to fix your problem. It’s not enough on its own to get a great credit score, you have to follow through on all to get big results. Starting to pay all bills on time is a good start, but not enough to make it on its own.
Payment history accounts for the largest percentage of our credit scores, 35%. I just want to give you one brief tip on always paying your bills on time. If I can tell you to do one thing to really make sure that this is happening for you, it’s to get your bills set upon automatic payments. You can even get rent payments set up on automatic payments.
If setting up automated payments scares you, then breaking down your monthly budget and cutting out any extra expenses possible, is mandatory. Do this by itemizing all your spending from the last quarter (3 months) bank statements. Don't leave anything out and you will be surprised at how much you can actually save.
Credit Utilization is another key piece to the puzzle. Credit utilization is a basic measure of the ratio of how much credit is utilized (used) versus the available credit limits. It’s calculated from your revolving credit lines (Credit Cards) and installment loans (Personal Loans, etc...). This is calculated simply by adding all the balances on OPEN revolving and installment accounts, then dividing by the total of the initial balance/credit limits. Once this is complete you will have your Credit Utilization Ratio.
So why does credit utilization matter? It’s a MASSIVE 30% piece of your credit score and it’s basically impossible to have a good credit score if there are issues with your credit utilization. To improve it, you can either lower balances (pay down debt) or you can increase the limits on revolving line items (amount of credit available on credit cards). This is the fastest way to boost your score of 50 to 100+ points in as little as 30 days or less.
All right, so how can you accomplish this? There are four different ways:
- Pay down the balances on your open accounts
- Increase your available credit limits, (Increase limits on existing credit cards if possible)
- Become an authorized user on an established account with someone you know. (Be sure they have good payment history and the balance is no higher than 25% of their limit or you will hurt your scores by taking on their negative account history)
- Get a consolidation loan for all your revolving debt
Step 2: Cleaning Up Your Credit Report
Most people with a credit score in the 300 to 690 range have some combination of these problems with their credit report:
- Collection Accounts
- Medical Bills
- Tax Liens
- Student Loans
- Late Payments
- Too many inquiries
There are many sites out there where you can view your credit report. We use SmartCredit to monitor my credit. Through the Score Tracker, Score Builder or Score Master you can track all your scores with simple charts and in-depth information.
So why are these negatives such a big deal? These things are about not paying a bill correctly or can easily be errors that are unknown to you at all. They are some of the biggest problems with your credit report. Step Two is THE BIGGEST, as far as getting massive improvement on your scores because it affects 35% of the calculation. You should use every means available to get anything negative removed from your credit report that doesn’t need to be there, legally. The way I would look at this is, this is a game... and one you only play to win.
There are 2 consumer protection laws that limit what can happen as far as your credit reports go:
- FCRA (Fair Credit Reporting Act)
- FDCPA (Fair Debt Collection Practices Act)
They’re both long legal documents. You are welcome to read them if you want, but I don’t recommend it because it’s hard to make sense of without legal verbiage training. Bottom line is, you use these laws in your favor to make sure that only the stuff that absolutely has to be on your credit report is showing up there and you can often get things removed from your credit report by leveraging these laws, with specific case laws (court cases that have been won against the bureaus), to your benefit.
Step 3: Rebuilding Positive Payment History
The key to rebuilding your credit hinges on positive credit history. This is the crucial 3rd Step towards improving your scores. Having a mix of different types of credit is a must! There are two types of accounts that will show up on your report, revolving and installment. On time payment history is what builds your scores as you are removing negative items. If you DO NOT have any positive accounts it is difficult for your scores to build. When you open the two accounts below, each month that you utilize them correctly your credit scores will continue to rise.