Is your credit score below 760? That’s the score at which you are likely to get the best interest rates on a mortgage. If you’re not interested in buying a home but need to rent a new apartment, it will still be a challenge if your credit score is below 600-650 (higher for more expensive units), regardless of your income. In some cases, even your job may depend on maintaining good credit! While only time and good credit habits will boost your credit score dramatically, if you are close to your desired level, there are some things you can do now to improve your credit score over a period of a few months.
Correct errors on your credit reports
Make sure your credit report doesn’t contain any errors. The Federal Trade Commission found that five percent of consumers had an error on at least one of their three credit reports from major credit bureaus. According to the Consumer Financial Protection Bureau, common credit reporting errors included things like mixing your accounts with someone with a similar or same name, identity theft, closed accounts reported as still open, and negative items remaining on your account after they should have been dropped. Here are steps you can take now to correct errors:
Request free copies of your complete credit reports from the three major credit bureaus on the federally authorized site annualcreditreport.com. Review them carefully, looking for items that aren’t yours, balances that have been paid, items that have been reported multiple times, and other mistakes.
Dispute any mistakes that you find. While this isn’t most people’s idea of a fun afternoon, it is something you can – and often should – do yourself or with the help of a nonprofit consumer credit counseling agency. The three major credit bureaus accept dispute filings online (links to dispute sites here: Equifax, TransUnion, Experian). If you are considering a for-profit credit repair firm, watch out for scams. Make sure they explain your rights to you (including your right to do it yourself), don’t ask for the entire fee up front, and don’t promise you a huge jump in your score. Unless you have complex credit problems, your money may be better spent paying down balances and building up an emergency fund so you don’t have to borrow again.
Make strategic payments
Are you making your minimum payments on time? Your payment history (where delinquent payments show up) contributes the most to your credit score. Late payments generally stay on your credit report for seven years. Make sure you:
Make all your payments on time. For most people, the easiest way to do this is to put all your bills on automatic payment. However, if you’re living paycheck to paycheck, you may need to stagger your bills throughout the month to avoid incurring overdraft fees.
Pay any outstanding bills that haven’t been sent to collection. Are you a month or two behind on a utility or credit card bill? If possible, pay those first.
A payment that is one to two months late doesn’t affect your credit as much as one which is made three months late or later. Once your accounts are current, they will begin contributing positive data to your credit report going forward. The late payment will still show up on your report, but the impact will lessen as time passes.
Pay any outstanding bills sent to collections. This demonstrates that you paid what you owed – better late than never. If the bill has been charged off, make sure you can pay it in full before paying it. Otherwise, the clock starts ticking on the collections process again and the item will stay on your account for another seven years.
Reduce your credit utilization
Credit utilization is how much of your available credit you are utilizing and contributes significantly to your overall score. It’s calculated by taking your total credit balances divided by your total borrowing power. Why is it so important? Lenders want to see that you aren’t using so much of your available borrowing power that it becomes a challenge to pay everything back. Best practice is to keep your credit utilization below 30 percent. To improve your credit utilization quickly:
Don’t close any cards or reduce your credit limit. This would reduce your total borrowing power, thus increasing your credit utilization.
Use some of your cash reserves to pay down balances so that credit utilization is less than 30 percent. The risk? You may have an emergency during the next few months and need to dip into credit again to pay for it. It’s probably worth a try, though.
Take a 401(k) plan loan to pay down balances to reduce utilization to less than 30 percent. A retirement plan loan is not reported to the credit bureaus. The transactions can be processed quickly and you may be able to execute this within a few weeks. As a bonus, you will replace high interest credit card debt with a low interest loan from your own retirement assets.
The biggest disadvantages? Since retirement plan loans generally have to be paid within 5 years and are deducted from your paycheck, it may squeeze your cash flow, so make sure you can afford to pay it back without reducing your retirement plan contributions. Plus, if you leave your employer for any reason before the loan is repaid, the unpaid loan balance can become an early retirement plan distribution, subject to income taxes and penalty.
Don’t close any accounts
Credit age (how long your accounts have been open) has a moderate impact on your credit score. Lenders generally want to see that you have at least three open and available sources of credit, where you are current on your payments. The longer you’ve had your account open in good standing the better. Keeping accounts open maintains your credit age and, as mentioned, helps with credit utilization.
Don’t even think about opening any new accounts
Shopping around for credit cards, mortgages or car loans can hurt your score. Credit inquiries that matter are those that happened during the past two years. During the period in which you are trying to raise your credit score, don’t apply for any new sources of credit.
Submit letters of explanation
Derogatory marks such as bankruptcy, tax liens, collections, foreclosure, short sales and civil judgments can be very damaging to your credit. They have a very high impact on your credit score. Most stay on your report for seven years. However, a bankruptcy under Chapter 7 stays on your credit report for ten years.
Time passed before the seven year period may reduce, but not eliminate the impact. For very derogatory items, you could consider submitting a very brief letter of explanation (but not an excuse) to explain how a particular negative event occurred (for example, a foreclosure following a long period of unemployment or late payments as a consequence of divorce). Credit experts are split as to whether it’s better to submit an explanation or say nothing.
Keep making progress
If you are within striking distance of a certain credit score needed to accomplish your goals, taking some or all of the steps listed above may help put you over the finish line. I wish you an excellent credit score!
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How to build business credit
1. KEEP YOUR INFORMATION CURRENT WITH ALL THREE CREDIT BUREAUS.
There are several credit bureaus that collect data and create business credit scores, including Dun & Bradstreet, Experian and Equifax. But compared with personal credit scores, which follow the standards set by Fair Isaac Corp. to produce a standard FICO score, business credit scores are much less streamlined. Each business credit bureau has a different formula for calculating scores, and different lenders report different types of data, says Gavin Harding, a senior business consultant at Experian.
Since you never know which credit bureau your vendors, creditors or potential customers will check, it’s smart to maintain all three. Dun & Bradstreet, for example, allows business owners to update basic business information (such as years in operation or number of employees) and upload financial statements. The more complete your profile, the better, Colley says. For more on how to monitor your score, check out our business credit score guide.
2. ESTABLISH TRADE LINES WITH YOUR SUPPLIERS.
If you buy supplies, ingredients or other materials from third-party vendors, those purchases could help build your business credit. Many suppliers extend trade credit, which means they allow you to pay several days or weeks after you receive the inventory. If you have this type of accounts-payable relationship, ask your supplier to report your payments to a business credit bureau. Your business credit score will get a boost as long as you stick to the terms of the trade agreement.
You need at least three trade lines to get a Dun & Bradstreet Paydex score, which measures past payment history. Even if you don’t work with a lot of suppliers, Colley suggests setting up trade lines with any small vendor, such as your water or office supplies distributor. If those vendors don’t report to a credit bureau, you can list them as a trade reference on your account, and Dun & Bradstreet will follow up to collect your trade data, Colley says.
3. MAKE PAYMENTS TO CREDITORS ON TIME OR EARLY.
Although each credit bureau uses slightly different methods of crunching business credit scores, all of them consider your history of paying creditors. To ensure a good score, make sure your payments are on time or, even better, early. Dun & Bradstreet only assigns perfect scores to those who pay early.
Nerd note: A long credit history tends to weigh favorably, so the sooner you can start establishing business credit, the better. Also, credit utilization is a factor in business credit scores — as it is with personal credit scores. So use your cards and lines of credit, but don’t max them out. Limit your spending to 20% to 30% of your credit limit.
4. BORROW FROM LENDERS THAT REPORT TO CREDIT BUREAUS.
Small-business loans can actually boost your business credit if you make all your payments on time and the lender reports to a business credit bureau. But not all lenders do. So if you’re intent on building business credit, ask the lender whether they report before you take out a small-business loan.
Banks typically report to credit bureaus, but if you have bad credit, you probably won’t qualify for a bank loan. Many online small-business lenders — which are more willing to lend to bad-credit borrowers — also report, including OnDeck, Lending Club, Funding Circle, Fundation, Kabbage and BlueVine. However, lenders including SmartBiz, Lighter Capital, Fundbox and merchant cash advance companies don’t report.
5. KEEP YOUR PUBLIC RECORDS CLEAN.
In addition to detailing your business’s history of paying creditors, your business credit report will have any public records filed in your business’s name, including bankruptcies, judgments and liens. A judgment is a court ruling; if the ruling is against you in a debt collection lawsuit, it will have a negative affect on your credit score. A lien is a creditor’s legal right to seize your property unless you pay an owed amount, such as an outstanding small-business loan or unpaid taxes.
These negative marks on your business credit report can haunt you. Bankruptcies, for example, stay on your Experian credit score for almost 10 years; tax liens, judgments and collections remain for almost seven years.
The bottom line
Building good business credit can help you get lower-interest small-business loans, business credit cards and better terms from your suppliers. It may even help attract new customers, since anyone can check your business’s credit score as a way to gauge your trustworthiness and responsibility. Your business credit score will likely vary by credit bureau because each bureau calculates scores differently. But generally, the best way to build business credit is to update your business information with business credit bureaus, establish trade lines, borrow from lenders that report to credit bureaus, and make payments early or on time.
