Improve Your Credit Worthiness

Taking action to improve you credit record will help make it easier to borrow in the future under more favorable terms.

First, check your credit reports for errors. You are entitled to request and receive a gratis credit report once a year from each of the three credit bureaus – Equifax, Trans Union, and Experian. You may do so by visiting www.annualcreditreport.com or by calling (877) 322-8228 to request your three reports. (Be careful if you order through the Web site since the credit rating agencies have confusing ads on the site that could result in your paying for the reports as part of an ongoing program although you're entitled to receive them free. Chances are you will have an error on at least one of the credit reports. Review each report carefully and follow the instructions for correcting any erroneous information on the dispute form that accompanies your report. The credit bureaus are required to investigate any items you dispute and correct any erroneous information on your report.

Second, pay your current obligations on time. Chances are that any besmirchments on your credit record are due to falling behind on making payments. While this information can remain on your credit report for many years, credit card companies and other lenders tend to forgive such sins if they happened sporadically in the past and your more recent record shows a nice string of on-time payments. So your most important assignment is to make on-time payments every month – early payments are even better, even if it's only minimum payments.

Third, take action to enhance your creditworthiness. The objective here is to be able to show the credit grantors that you are making steady progress at managing your financial obligations. Make sure that at least some of the companies that extend you credit report to the credit bureaus. Many may not, including banks and credit unions and gasoline card companies. Be particularly careful about managing the loan balances on those that do report. Keep the outstanding balances as low as possible, ideally under 50% of the maximum allowable loan. Eventually, though, you'll want to get into the habit of paying off the entire balance each month. While the credit grantors may not appreciate that habit – the scalawags – the credit bureaus will.

If you've had trouble paying off credit cards in the past, you may be tempted to return your card to the credit card company along with a few not-too-well-chosen words. But closing out accounts may negatively affect your credit since the credit agencies consider the ratio of total debts to total available credit. So keep the paid off card while remembering that there's no law that says you have to use it. In fact, the best way to retaliate against the credit card company is to not use the card. They don't collect any fees from the establishments that accept your card and they don't collect any interest off you. If you eventually want to close out some charge accounts, do it slowly, starting with the most recently-acquired accounts. You should keep your older accounts open because they show that you have had a longer credit history.

Special note to those with a particularly checkered credit history. If you have had some severe problems in the past, perhaps including loan charge offs or bankruptcy, don't despair. (If you had to file for personal bankruptcy, you're not alone. In the past decade, more than one out of every 10 U.S. households went bankrupt.) You can reestablish your credit faster than you probably think. If you can't qualify for a traditional credit card, obtain a secured credit card. A secured credit card works just like a regular credit card except that any balances you run are secured by a deposit you have made with the credit card company. Also, open a savings account at your bank or credit union to demonstrate that you're working toward a better financial future and to show potential lenders that you've got some money set aside to pay off future obligations. Most importantly, don't give up. Stories abound of people who have turned around an awful credit record in just a few years. Some have even qualified for a mortgage a mere three years after filing for bankruptcy!