5 Tips to Improve Your Credit Score

Maintaining a solid credit score is critical for real instate investors. In a recent article, we looked at theimpact of your credit score on mortgage interest rates. Today, we are going to describe 5 tips to help you improve your credit score.

1. Order your credit report and check for errors: Your credit score is derived from your credit report. Errors on your credit report can have a major impact on your credit score. You are entitled to receive a free credit report annually from the three major credit reporting agencies, which you can order from Annualcreditreport.com. You’ll want to review carefully each credit account and inquiry to make sure the information is accurate. The credit reports come with forms to dispute any errors you may find.
2. Pay your bills on time: This is an obvious point, but late payments can be a credit score killer. There are a couple things to keep in mind. First, credit card companies generally report payments that are 30 days late or more. This doesn’t mean that being one or two days late with the payment is a good idea. But when I’ve been a couple days late because the bill got lost under the paper on my desk, I’ve called the credit card company, paid the bill, and the late payment has never showed up on my credit. Second, when it comes to late payments, the credit score is influenced by the recency, frequency and severity of the late payments. In other words, not all late payments are treated alike. Here is what Fair Isaac (of FICO score fame) says about the impact of late payments on a credit score:
   

   Late payments are not an automatic “scorekiller.” An overall good credit picture can outweigh one or two instances of, say, late credit card payments. But having no late payments in your credit report doesn’t mean you will get a “perfect score.” Some 60%–65% of credit reports show no late payments at all. Your payment history is just one piece of information used in calculating your FICO® score.

3. Pay down your debt: I know the point here is to increase your credit score so you can borrow more to invest in real estate. But the reality is that paying down your existing debt can improve your credit score. One important factor in your credit score is the amount of available credit you have. $10,000 in debt with a credit limit of $10,000 (i.e., being maxed out) will present a greater credit risk all things being equal than $10,000 in debt with a $100,000 credit limit. And this brings us to tip #4.
4. Don’t close credit cards or other revolving credit accounts: This may seem counterintuitive, but closing credit card and other revolving accounts will not improve your credit score, and it may hurt it. As mentioned in tip #3, one factor that goes into your credit score is the amount of available credit you have. By closing revolving accounts, you reduce the amount of this available credit. And because the age of your accounts is also a factor, closing older revolving accounts can further deteriorate your score. Here is what Fair Isaac has to say on this point:
   

   In some cases, having a very small balance without missing a payment shows that you have managed credit responsibly, and may be slightly better than carrying no balance at all. On the other hand, closing unused credit accounts that show zero balances and that are in good standing will not raise your FICO® score.

5. Apply for credit judiciously: To build up your credit history and score, you need to apply for credit. But there comes a point when applying for more credit will actually lower your credit score, at least for a time. Opening several credit accounts in a short period of time, for example, represents greater credit risk. In addition, inquiries to your credit report as a result of applying for new credit can lower your score. As Fair Isaac explains, for most people one additional inquiry may reduce your score by only 5 points:
   

   For most people, one additional credit inquiry will take less than five points off their FICO® score. However, inquiries can have a greater impact if you have few accounts or a short credit history. Large numbers of inquiries also mean greater risk: People with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports.

If you’d like to learn more about improving credit scores, there are two resources I recommend. The first is a brochure from Fair Isaac called Understanding Your FICO® Score (pdf). The second is Your Credit Score: How to Fix, Improve, and Protect the 3-Digit Number that Shapes Your Financial Future (2nd Edition) (Liz Pulliam Weston). Both resources are excellent guides to understanding credit reports and credit scores.

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