The first step in rising your credit score is to check out what's on your credit report. You can get a copy of all three credit bureau's reports for free by logging onto Free Annual Credit Report by clicking this link . You are entitled to a free credit report each year from Experian, Equifax, and TransUnion.
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The first step in fixing credit report errors is to identify what's incorrect - look over all three reports and review them for accuracy. Look for:
Late payments. There should be no late payments over seven years old on the report. This is important, as approximately 35 percent of a credit score is based on timely payments.
Collections. The report shouldn't show any collections or charge-offs more than seven years old. It's a good idea for consumers to save copies of their credit report for seven years so they have proof of when an item was added.
Payment records. All paid-in-full installment loans and all collections that have been paid in full or settled for less than the amount due should show a zero balance. Sometimes collections are not updated after they've been paid or settled.
Mysterious accounts. Consumers should be able to recognize all accounts listed on the report. Incorrect accounts do sometimes appear, either by mistaken identity or by identity theft. Consumers should contact the creditor immediately to compare their name and Social Security number with the one shown for the incorrect amount. In the case of an incorrect collection, consumers may have to request a "validation of debt," or what is sometimes called a "media packet," which provides details on the account holder. If the account is a case of identity theft, the consumer should request a fraud affidavit from the creditor. It's also a smart idea to file a police report.
Original dates. Length of credit history is 15 percent of a credit score, so consumers should be sure the original dates they opened their accounts are accurate. Original account dates could be reported inaccurately if a credit card company is acquired or merged, or if a credit card is reported lost or stolen.
Available credit. Credit limits on the credit report should match up with credit card statements. It's best to keep balances under 50 percent of the available limit; less than 30 percent is even better. Debt accounts for 30 percent of your score.
Types of accounts. Sometimes accounts are not categorized correctly. A home equity line of credit should be listed as a second mortgage, not just a line of credit. If the account type is not reflected properly, consumers should contact the creditor.
Reason codes. Consumers should read what the credit bureau has to say about why their score is what it is. These so-called "reason codes" appear in the credit report to explain what factors played into the credit score and what actions can be taken to improve the score over time. One caveat: If a consumer already has a good credit score, ignore the reason codes, as making changes could actually result in a lower score.
One last thing: Think twice before closing that credit card, which shrinks the available credit listed on your report and hurts the credit utilization ratio.
The key to good credit is being proactive in reviewing credit reports regularly. If consumers find their credit score is a respectable 680 or higher, removing minor dings may not be worth the effort. Otherwise, finding and eliminating errors is one way to get a high credit rating.
Take the Steps to Get Your Finances in Order
1. Develop a household budget. Instead of creating a budget of what you’d like to spend, use receipts to create a budget that reflects your actual spending habits over the last several months.
2. Reduce your debt. Lenders generally look for a total debt load of no more than 36 percent of income. This figure includes your mortgage, which typically ranges between 25 and 28 percent of your net household income. So you need to get monthly payments on the rest of your installment debt — car loans, student loans, and revolving balances on credit cards — down to between 8 and 10 percent of your net monthly income.
3. Look for ways to save. You probably know how much you spend on rent and utilities, but little expenses add up, too. Try writing down everything you spend for one month.
4. Increase your income. Now’s the time to ask for a raise! You may want to consider taking on a second job to get your income at a level high enough to qualify for the home you want.
5. Save for a down payment. Designate a certain amount of money each month to put away in your savings account. Although it’s possible to get a mortgage with only 5 percent down, or even less, you can usually get a better rate if you put down a larger percentage of the total purchase. Aim for a 20 percent down payment.
6. Keep your job. While you don’t need to be in the same job forever to qualify for a home loan, having a job for less than two years may mean you have to pay a higher interest rate.
7. Establish a good credit history. Get a credit card and make payments by the due date. Do the same for all your other bills, too.
