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Transform your credit score in 1, 2, 3!

Keeping your accounts current, lowering your credit usage, and fixing errors on your credit report can have maximum and immediate impact on your credit score.

Your credit score makes your financial world go round. It is the standardized way that the financial world determines if you are a financially responsible person. The more responsible they determine you are, the less risky you seem and, as a result, the less interest you will typically have to pay and vice versa.

What is the benefit of a solid credit score?

There are many. For starters, lower interest rates on personal loans, mortgages, credit cards, and insurance policy rates. In addition, it can eliminate the need for security deposits and even help you get that job that you’ve been aiming for. 

Let’s talk about what you can do to transform your credit score.  

The two areas that will give you the most bang for your proverbial buck are Payment History and Amounts Owed; together they generally make up 65 percent of your score.

Here are three simple steps you can take towards giving your credit score a powerful boost, and help put money back in your pocket. Your credit improvement checklist:

  1. Pay your bills on time.
  2. Stay below your credit limit.
  3. Review your credit report and fix any errors and inconsistencies.

1. Pay your bills on time.  (Typically a 35 percent weighting): Payment history helps determine your track record of reliability. As you can see, this is usually weighted the heaviest in determining your credit score. Your payment history stays on your credit report for up to seven years, so it is critical that you take the steps necessary to get all your accounts current, and pay every bill on time.

Strategies for pursuing success:

  • Get caught up on all payments that are due. Take the extra step to give the creditor a call and confirm the amount due. While you have them on the phone, share that your goal is to improve your credit score and request that any previous late payments be rescinded from your report. A little heart to heart can go a long way, and it’s a win-win for you and the creditor (who just wants to get paid).
  • Set up automatic bill pay on all your monthly obligations. Even if you feel that you can only make the minimum payment, making the minimum payment is ALWAYS better than a late payment. Putting these things on automatic will ensure that your payments will be made on time. Are you worried about over drafting your account or properly budgeting? Take the extra step of creating a separate checking account for your monthly bills, and automatically deposit what you need to meet those obligations every month.  

2. Stay below your credit limit. (Typically a 30 percent weighting). This is another credit score heavyweight. Creditors want to see that you are using your credit responsibly and not biting off more than you can chew. A good rule of thumb is to keep your credit usage to less than 30 percent of your credit line. Ideally you want this number as close to zero as possible. This is one area where you can usually see immediate month-to-month improvements on your credit score.

Strategies for pursuing success:

  • Pay off the highest balances. Monitor your credit to identify all of your open accounts. To get the maximum impact, pay these down according to the highest credit usage balances.  
  • Request a credit line increase. If your account is in good standing, you can often get approved for credit line increases, which generally improves your credit usage numbers. As you improve your credit, and keep your accounts in good standing you can request a credit line increase every 6-12 months. I also suggest that when you contact your creditor, confirm if the credit report they use can be a soft pull versus a hard pull. The hard pull can impact your credit score negatively if you’ve had several “New Inquiries” on your credit in the past 24 months.
  • Consider consolidating your debt. This is one way of taking control of your debts, lowering your interest rates, and decreasing your credit usage. Make sure you shop around for the best lenders and the best rates. You want a lower rate than what you are currently paying, and you want to make sure that you are in a position and have the discipline to not run up those credit card balances again.  

3. Review your credit report and fix any errors and inconsistencies. This step has the potential to positively impact your FICO score across all areas.  Your credit report could have errors ranging from:

  • Erroneous accounts being listed
  • Inaccurate payment history
  • Incorrect credit balances and credit usage data
  • Stale or erroneous negative information

Strategies for pursuing success:

  • Obtain and review your credit report annually for free by going to annualcreditreport.com. You can get access to your credit report from the three top credit reporting agencies: Equifax, Experian, and Transunion. Once you access each report, save it, review it carefully, and note every error, omission, or inconsistency. Next, dispute these errors either online, via phone, or mail. (Tip: the online process is considerably faster!) Please note that each agency has up to 30 days to validate your dispute, or the dispute must be removed from your credit report. This could lead to an immediate improvement to your credit score!  
  • Sign up for a credit monitoring service. There are quite a few services out there but I believe Creditkarma and Nerdwallet provide great options for free. This service will allow you the opportunity to stay on top of future changes to your credit report in real time, in addition to helping you identify potential credit fraud on your accounts.

One final point: when making life improvement decisions it is important to have a method of accountability and follow through. If you are a true DIY’ER, then you have it in the bag. If, like many of us, it can take a lot to get you going, then involve a friend, spouse, family member, or engage a financial professional that can be a partner in helping you take the action necessary towards improving your financial life.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.