Keys to Improving Your Credit Score

We are often asked by borrowers and prospective borrowers (1) how they can improve their credit score and (2) how quickly that improvement will be reflected on their credit report. The second question is not an easy one to answer, as different strategies for improving credit can impact the improvement in credit scoring faster than others.  There is no authoritative answer that we have come across that would enable us to say, “If you do X, you will see an improvement in your credit score in Y number of weeks.” In fact, American Express explicitly states, “There is no magic formula for boosting your credit score by 100 points, or within 30 days.”

In terms of making improvements to a credit score, the highest priority for a consumer should be to check his credit report for any errors. While estimates vary, it is typically reported that somewhere between 20% and 25% of credit reports contain errors. Some of the more common errors include misreported payments and fraudulent or duplicated accounts. The Federal Trade Commission (FTC) offers a good resource for how to go about fixing mistakes on a credit report. The FTC also offers the following important information: “If you’re considering paying a credit repair organization to help fix your credit, keep in mind that anything they can do for you legally, you can do for yourself at little or no cost. Credit repair organizations can NOT legally remove accurate negative information from your credit report.”

After identifying and working to rectify mistakes on the credit report, what other options does a consumer have for improving his credit score?

• If the credit report shows that the consumer is behind on any payments, the consumer should bring those accounts current as soon as possible. While missed or late payments will continue to appear as negative events on a credit report for seven years, the impact of those events lessens over time; meaning, older late payments have less of an impact than more recent ones.
• Experian offers a product called Experian Boost that is free and is marketed as allowing a consumer to raise his FICO score “instantly.” If a consumer pays his Netflix, phone and utility bills on time, the consumer can connect the bank account(s) used to pay those bills and get a “boost” to their credit score for those timely payments. Experian’s marketing materials claim that users who received a boost improved their FICO Score 7 based on Experian Data by 13 points.
• One of the factors that credit scoring models consider is the amount of debt a consumer has as compared to his credit limits. If the amount owed is close to the credit limit, this is likely to negatively impact the credit score. This comparison is known as the “credit utilization rate” (CUR). It is generally recommended that the CUR be kept below 30%. If a consumer’s CUR is above that but he has no problem paying bills in full and on time, he can contact his card issuer and ask for a credit increase. Assuming he keeps his spending steady, that will necessarily improve his CUR. Another option for decreasing the CUR is by taking out an additional credit card but not using it.
• If the consumer has an unpaid balance that he is unable to satisfy in full, it is better to pay towards the balance. Even though not paying in full will still reflect negatively on his credit score, it will have less of a negative effect than not paying it at all (or declaring bankruptcy).
• If there is an old collection account on a credit report that has since been paid off, the consumer should ask to have the account removed altogether. Having it removed will reflect more positively on the credit score than having it shown—even if the way it is being shown is that the debt has been fully extinguished. The “ask” may be more successful if made to the collection agency or debt buyer versus the original creditor.
• Another way that a credit score can be boosted is by having someone with good credit add you as an authorized user to their credit card account. That person would not need to provide you with an actual credit card to use; they can simply add you as an authorized user. This approach is not without risk, however; the person who is adding you to their account could run into their own credit problems which would have a cascade effect on you.
• Yet another way to improve a credit score is by taking out a credit-builder loan. This is an installment loan with fixed monthly payments. Paying off installment loans in a timely manner contributes to the restoration of credit. Repaying the loan in a timely manner is the most important goal—not the size of the credit-builder loan. Accordingly, the best approach would be a small loan with easily manageable monthly payments. Experian has a blog post that provides a robust explanation of credit-builder loans and how they can be helpful.

In general, improving a consumer’s credit takes time, but is most definitely worth the effort. Credit can be rebuilt by focusing on paying bills by their due date, paying off debt (especially credit card debt), and not taking on new debt. If you have several credit cards with unpaid balances, focus on paying off the card with the highest unpaid balance first.