How to improve your credit score
In order to improve your credit score, you must use credit. The key to improving your credit score is getting a credit card and using it wisely. It's important to get a card with the lowest possible interest, but it's also important to not get a card with a monthly account maintenance fee or an annual fee. Monthly maintenance fees suck your money away from paying off the balance and annual fees are another slap in the face. Finding the perfect credit card is like finding the perfect mate, almost impossible. It's always a working relationship between you and your creditor. If you are a new credit user, finding a card without fees will be difficult.
Once you have your brand spanking new credit card, go out and spend a little bit of the total limit. Make sure not to spend a whole bunch though. Do not use over 20% of the total credit you have available to you at one time except for emergencies. Also, do not use more than 20% of the total limit on each card. Again, you have to use credit to become credit worthy. Start with using only 1% to 5% of the total credit limit. This is plenty enough to keep your card active and generating credit. If you have a $5,000.00 limit with a minimum payment of $50 a month, it's probably a good idea to spend about $100 on the credit card and pay the minimum payments. This will incur interest. If you don't incur interest though, your credit score actually drops. Every month as you pay the minimum, use about $40 in order to keep a balance around 1%-2% and keep racking up credit. It is extremely important to never use more than 20% of the total balance unless absolutely necessary in order to survive.
Once you have made your purchases, be sure to pay on time every single solitary month. Missing just one payment can reduce your credit score. If you miss more than one payment, it's a lot of trouble for your credit score. Having just 4% of your payments be late will ruin your credit. If you are in collections, it will influence your score highly in a negative way for a very long time. Try to pay all of your bills on time, but do not be late on credit cards at all. If you are already in collections, try to work out a payment plan with your creditor and pay them off as soon as possible. Even if you have paid off your creditors that have taken you to collections, it can take up to 15 years for some negative marks to come off of your credit score.
Try to limit yourself to a new credit card every two to four years. Every time you apply for a loan, credit card, or mortgage a hard credit check is done and is left on your credit report. These hard credit checks can adversely affect your credit score, especially when you have very little credit history. The more you have had done, the lower your credit score will be. Try to keep your hard credit checks to a minimum by avoiding to many loans or credit cards at once. Ideally, 1 or less hard credit check per year should be done. This has low influence over total credit score, but it can be enough to knock your score down into junk status if it was hanging on by a thread in the better than junk status.
Once you have had your credit card for a while, you might get new cards. Every two to four years is acceptable when applying for additional cards. Think twice before closing your oldest card, even if the terms are terrible. If your next oldest card is 8 or more years old, feel free to ditch the eldest card. If not, your credit score could be negatively influenced by reducing the age of accounts and by increasing the amount of utilization of credit. It's advisable to get a new card before getting rid of your eldest card that is at least 8 years old. This will reduce the negative impact of the overall utilization going up.
Finally, it's important to have many different credit accounts from various creditors for various reasons. Having more than 21 total accounts, in good standing, will help improve your credit score. Having a credit line open for an auto loan, a mortgage, 2 or 3 credit cards, a student loan, and a store card will improve your credit. Just make sure not to utilize a lot of overall total credit. Having the credit available, using it in small amounts and paying on time are the keys to success.
To recap, use your credit every month, but never use more than 20% of your total credit. Pay on time every time. Keep out of collections and pay anything off that is in collections. Keep your cards a long time and have multiple lines of credit open at once. Finally, try not to get a lot of credit at one time to avoid hard inquiries into your credit history. If you follow this advice, your credit score will improve over the course of one to two years.
If you already have bad credit, there are additional steps that can be taken to improve your credit score. Pay off some of the balance on your credit cards and pay on time from now on. Try to bring your total balance down to less than 20% of the total amount available and keep it that low forever more. Pay off any and all accounts that are in collections as fast as humanly possible. Stop applying for more cards, loans, or anything. Just work hard at paying off your debt throwing every excess dollar you have into paying your balances down. If you follow these tips, your credit score will improve dramatically in a year or two.