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5 Steps To Improve Your Credit Score

ProBlogger is currently organizing another group writing project and the theme this time around is a *Top 5* list.

With regard to personal finance and debt management, there are numerous topics that lend themselves well to a *Top 5* list. As an example, FreeMoneyFinance has written a post on the The Top Five Steps to Grow Your Net Worth that is well worth a read.

When I sat down to think about a topic for my own *Top 5* list, I immediately thought of how to improve your credit score. On the financial message boards that I frequent, this is often one of the most common questions asked and is of particular concern to people that have struggled with debt in the past and are trying to improve their situation.

Without further ado, I present to you my Top 5 Steps to Improve Your Credit Score:

  1. Pay at least the minimum due on time every month. The main reason that my wife and I maintained good credit scores while battling our way out of debt was because we always made at least the minimum payment on time every month. It wasn’t always easy and there were some very lean months right out of college but neither of us ever had a late payment. Even though you aren’t paying the debt off entirely, the lenders are really only concerned with whether or not you are going to pay them on time. Timely payments accounts for 35% of your FICO score so this is where you can get the most bang for your buck.

  2. Reduce your debt to available credit ratio. The next largest impact on your FICO score is the amount of money you owe on your credit cards relative to your total credit limit, also known as your debt to available credit ratio. The general rule of thumb is to shoot for a ratio no higher than 25% but obviously the lower the ratio the better. While the best scenario is to improve the ratio by reducing the outstanding debt, another option to boost the ratio is to try and increase your total credit limit. Be careful though as the additional credit could lead you to more debt if you are still struggling with the issues that resulted in the original debt.

  3. Do not cancel or close your cards as you pay them off. Often times people that have struggled with debt will want to close the credit card as soon as they eliminate the outstanding balance. However, this action can negatively impact your credit score in a number of ways. First, one aspect of your credit score is the length of your credit history and older cards are weighted more heavily. If you happen to close one of your older cards, you will be removing that lengthy credit history from your account. Another reason your score may decrease relates back to the debt to available credit ratio. When you close that account, you remove the entire available credit from your total but the outstanding debt does not decrease at all because the balance was zero. After working so hard to eliminate the debt, you don’t want to skew your ratio by closing your card. The last reason to keep paid off cards open is that they will often present attractive balance transfer offers that can help you expedite your debt repayment.

  4. Correct mistakes on your credit report. As I am sure most of you know, everyone is now entitled to one free credit report per 12 month period from each of the three main credit reporting agencies. When you order your credit report, review the information closely and dispute anything that is a blatant mistake. Be prepared as correcting mistakes can sometimes be a lengthy process but if your report contains errors it is imperative that you get them corrected.

  5. Be responsible with the number and type of credit accounts. As you work on improving your credit score, do not rush out and sign up for 10 new credit cards in an attempt to improve your debt to available credit score. The number of open accounts can work against you as lenders might view too much available credit as a potential risk. As a general rule of thumb, try to keep your accounts down to 3-4 credit cards including traditional cards and department store cards and an installment loan such as a student loan, car loan or mortgage. If you don’t meet this guideline, it is not a good idea to close accounts or add new accounts to fit the mold but that is a general example of a healthy mix of credit.

There you have my top 5 steps to improve your credit score. If you find that you can only follow one of these steps at the beginning, make it the step of paying your bills on time. This one step can help prevent you from falling deeper into debt with late payments and over the limit fees, which then result in increased rates and make the problem even worse.

This list is not an exhaustive list and I challenge you to find additional ways that you can improve your credit score. If you have a step that you think can benefit others, please take a moment to share it with everyone!

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52 Responses to 5 Steps To Improve Your Credit Score

  1. [...] Earlier I wrote 5 Steps To Improve Your Credit Score for my personal finance blog, which I then submitted to ProBlogger’s latest writing project. [...]

  2. [...] 5 Steps To Improve Your Credit Score by derek [...]

  3. THanks for these, I must reduce my number of credit cards….

    • Richard, you’re welcome. Just be sure to be aware of the overall impact that closing some of your credit cards can have on your credit score.

      If you anticipate the need for a new loan for a home or car, you would be best to wait until after securing that loan. Otherwise you may close a few cards and take a hit to your credit score, which could impact the lenders decision on your loan.

      But if your credit score is not an immediate concern and it will not skew your debt to credit ratio, you might want to reduce the number of cards to what you feel is comfortable.

  4. [...] 5 Steps To Improve Your Credit Score by derek [...]

  5. Thanks, Derek. These were very helpful tips! I’m reading thru the ProBlogger.net entries (ack, so many!), and I really enjoyed your post. I will try to link-back to favorites in the end. Take care, Sherri

    • Sherri, thanks for stopping by and sharing your thoughts. Darren’s writing projects usually produce a wealth of great posts and I hope to have time to read through the first batch tonight.

  6. [...] 5 Steps To Improve Your Credit Score by derek [...]

  7. [...] 5 Steps To Improve Your Credit Score by derek [...]

  8. Thanks for the great post. It always bothers me when I see stores offer people a discount if they will open a credit card in their premise. People have no idea they are lowering their credit scores if they accept these tempting sells! Yet the people who make the offer – know the real cost to customers. Why are so few speaking out?

    • Ellen, thanks for stopping by and sharing your thoughts. As easy as it is to blame the companies, the responsibility is on the people to educate themselves with regard to credit and their personal finances.

      It is a shame to see how many people in this country are unaware of things like this though. That is one of the reasons behind why I started this site, if I could help educate even one person I would consider it a success.

  9. [...] 5 Steps To Improve Your Credit Score by derek [...]

  10. [...] 5 Steps To Improve Your Credit Score by derek [...]

  11. You build a great case for awareness. Every time I am offered these fast cheap cards I tell the clerks about the negative effect these have on customers credit – young people are often denied a mortgage because this happened to them unaware..

    Some clerks already knew this but say they have no choice, others tell me they are very surprised – but have no choice but to offer new credit cards, and one gal said no to her employer on the grounds of ethics and her employer accepted her position. Go figure… Thanks, we need sites like yours!

    • It’s nice to see that you actually mention the negative effects to the people offering the cards.

      One common complaint I hear is when college kids sign up for a bunch of cards to get the free t-shirt or whatever goofy prize is being offered only to find out later how it has impacted their credit score. But in my opinion I cannot fault the credit card companies but the lack of education on the part of the kids.

      As a parent of two boys myself, I understand my responsibility to educate my children so they are prepared to manage their finances from an early age. I’d love to be able to offer that same education to other children and/or adults as well.

  12. Yes, I too have seen what you describe happen, and your boys are lucky to have you as dad. No question. There is a larger issue still, as I see it though, and it relates to youth who have less understanding or maturity in these matters.

    On the flip side, it remains unethical practice for men who know this will happen to youth – to dupe our youth for their own greed in sales. I am sad to see the lack of ethics practiced by leaders who knew the difference.

    These guys KNOW the truth — and the same folks lead others into murky water for their own benefits. That spells ethical problem – as I see it. But I am no expert — which is why I so enjoy your blog.

    I do teach ethics as a graduate university level and this to me is core to some of the moral issues we constantly face in US. Nuff said:-) Thanks for the great post – and discussion:-)

    • Thank you for the kind words. You’re right that there is a larger issue regarding youth with less understanding/maturity in these matters. IMO, that is often because their role models (which is often their parents) might not have the knowledge or maturity themselves.

      To move this away from a financial topic and to touch on the ethical issues that you mentioned, I’d be curious to get your opinion on something. You mention the unethical practice of the credit card companies duping our youth for their own greed.

      Do you see the same unethical practice for manufacturers of cigarettes? Alcohol? How about unhealthy snack foods? Where do you draw the line on companies being unethical versus the individual consumer needing to demonstrate their own responsibility?

      Ellen, feel free to contact me via email if you would prefer to continue the discussion of ethics outside of the comments. It is a fascinating topic to me and I’m sure you have some great ideas. Thank you for the dialog!

  13. [...] 5 Steps To Improve Your Credit Score by derek [...]

  14. Mnc, I too am intrigued by the experience and wisdom in your words. I wish I had hot answers — to your brilliant questions. Instead I do have one 2-bit thought.

    When in China recently, I taught a brain based ethics course to top leaders. In that course I drew a line with a rope and asked folks who see cigarettes as good for the country to stand on one side – and those against this move to stand on the other. The discussion was brilliant and we all left refreshed by the other’s ideas!

    That’s how I feel at your blog. Stuff is not always instantly black and white — but ethical priciples are there for great discussions! Your sites rocks for this reason.

    Your turn…

    • The experience you had in China sounds very interesting and as I am sure you noticed, the real benefit is found when people with differing opinions can come together and discuss their ideas and not judge others for their ideas.

      Unfortunately it seems far too common that discussions about ethical principles quickly erodes into a battle of “I’m right and you’re wrong” without taking the time to listen and evaluate the opinions of others.

      Again, I cannot thank you enough for taking the time to share your feedback on my site and engaging in some refreshing dialog. From what I have read on your site, it appears you have a lot of wisdom to share and I look forward to seeing you around here more often! :)

  15. [...] 5 Steps To Improve Your Credit Score by derek [...]

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  39. Often, we think of improving our scores for a better mortgage interest rate. But improving your credit score can greatly impact your car insurance and home insurance rates. Nearly every insurance company runs insurance scores to determine which tier to place you into. Another suggestion is to pay down balances on credit cards where you have the balance at or near the available limit.

  40. [...] 5 Steps To Improve Your Credit Score by derek [...]

  41. [...] 5 Steps To Improve Your Credit Score by derek [...]

  42. Great steps. I’m gonna try and follow these and see how I do. Thanks.

  43. This is such a big deal nowadays with all the foreclosures and short sales. We’re going to see a lot more of this in the future.

  44. Hi Derek,

    One important thing to build an excellent credit is pay your bills on time. Here are the factors that affects your credit score:

    * Timeliness of your payments
    * The amount of your credit
    * They type of credit you have
    * The amount of your available credit

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