Improve Credit For Lower Rates

It's possible to improve your credit and the best way to do it will depend on your unique situation and what's on your credit. There are some basic general steps that help most people. If your credit is not higher because you have not built a lot of credit, opening an account that reports to the bureaus is likely best. If your score is low because of late payments or high balances compared to their limits, paying on time and paying down balances are the better path. Since everyone's situation is very unique, let's start by covering general steps that can help almost anyone's credit improve.

Make Payments On-Time

One of the most important factors in determining your credit score is to have an on-time payment history. For credit reporting, payments made within 29 days of their due date are still considered on-time and not reported late to the credit bureau. Most credit score models are creating your score based on the prediction of how often you would have a 90 day late payment in the next 24 months, so a history of on-time payments will substantially help. Recent late payments tend to hurt the score the most and the longer that payments are late, the more they hurt your score. For example a payment being 60 days late hurts the score more than a 30 day late.

It's important to note that even though your late payments are not reported late to the bureau unless they are 30 days late, accounts like your mortgage and auto loan can charge you late fees much earlier than 30 days late. Credit card companies have it in your contract that they can charge late fees and increase your interest rate if you are a certain amount of days late. Setting up automatic payments and reviewing monthly statements becomes important because even one late payment can drastically decrease your score and make loans more expensive in the future.

Pay Down Revolving Balances

Revolving accounts are considered credit cards, lines of credit and home equity lines of credit and their balance compared to their borrowing limit can greatly impact your score. The specific term is called credit utilization rate or balance to limits ratio. When your balance is above 30% of the limit, it can begin to negatively impact your score, even when you are making payments on time. The higher that ratio, the greater the impact. So on a credit card you can put up to $10,000 on, a $7,000 balance will hurt your score much worse than a $3,000 balance. Paying down these balance can be difficult, but also one of the best priorities because most revolving accounts have higher interest rates than other types of loans.

Past Due & Collections

Each year, we are allowed to obtain a free copy of our credit to see what is reporting. Sometimes there are collection accounts or past due balances that we were not aware existed. First, we should look for accuracy and any incorrect information we should go on the credit bureau website and dispute the account, especially collections.  If there are correct collections, we should get in touch with the collection company, find a ways to pay it off with their agreement to update credit as paid in full. In some cases, some collection agency will be willing to remove reporting if paid in full immediately.

If there are any past  due accounts, they can have a large impact on the score decrease so past due accounts should be paid immediately if possible. Some life circumstances are difficult and extra money is not available to pay a past due balance current. If we are going to need auto loan financing or mortgage financing in the near future and we need a higher score, those may be the humbling moments in life to ask friends and family for help, but long-term will be a very smart move.

Open New Account

Sometimes credit becomes so bad that applying for most normal new accounts end in a decline of new account. When that happens, opening a secured credit card can be one of the few options available. The downside is that secured credit cards typically have high fees and interest rates to start and require you to deposit money almost like you would in a checking account. The good news is that it can be a big first step to rebuilding credit if you use it wisely, keep the balance low and make on-time payments every month. 

Authorized User

If you have a spouse, parent, child or loved one that has always been an expert and keeping a high credit score, they may be able to do a big favor if they trust you enough and have a revolving account with a high limit and low balance. Loved ones can add you on their credit account by calling the creditor and making you an authorized user on their account. Once you are added as an authorized user, you inherit their credit history on that account. Credit bureaus still note that it's not solely your account and that you are an authorized user, but you also get most of the benefits of having a great history and low balance to limits ratio on the account.