Once upon a time, when I was younger and less financially obsessive, I missed a credit card payment. I had just moved to a new state, and in the chaos I didn't even realize that the bill never showed up.
For years, that single late payment hung on my credit report like bad onion-and-garlic breath that no amount of mints could cure. Finally, this year, it disappears. I can't quantify the impact that late payment had on my credit score or my interest rates over the years, but it probably wasn't good.
Winning the good credit game takes tortoise-like patience, and it can be very frustrating for any financial hares who want to quickly erase their poor marks. Credit errors can stay on your record for seven years, and bankruptcies linger for 10 years.
Bad credit scores can be costly, but you're not stuck with a poor credit score forever. Once you know how lenders weigh your behavior, you can take the right steps to improve your image. (Find out more about what goes into your credit score here.)
To undo any of your credit mistakes, you'll need to take the slow and steady route to re-establishing proof that you're a good credit risk. If you know you'll be in the market for a big purchase, like a home or car, it's never too early to start improving your score. (As an added bonus, better credit scores can also improve your credit card interest rates.)
Before you begin, get copies of all three of the credit reports issued by the three major reporting agencies (Equifax, Experian, and TransUnion). You're entitled to one free report from each bureau every year. All three might have slightly different information. Scour the reports for any inaccuracies and request that they be fixed. (The different reporting agencies will give you instructions.) Perusing these reports will also give you a good idea of where you might be misbehaving.
Once you've done that, start tackling the problems that can bring down your credit score:
- Pay all your bills on time every month. Payment history is the biggest component of your credit score, so improving your record here can do a lot of good. If you've missed payments in the past, get caught up and stay current. Paying off a collection account will not remove it entirely because it will stay on your report for seven years. But establishing a recent record of timely payments, and maintaining that record for as long as possible, can go a long way toward building a good credit score.
- Start paying down your credit cards and other revolving credit. Lenders want to see whether you're maxing out your available credit, something that raises a big, red flag signalling potential credit peril. Moving your debt among your cards may get you a lower interest rate (important for eventually paying those balances off), but it won't do much for your score.
- Don't open a whole bunch of new credit card accounts at once. Although you might think this could work in your favor, by making your credit card balances look smaller when compared with your available credit, it could backfire. One variable in your credit score looks at new accounts, and too many could make lenders think you're primed for a shopping spree. In fact, holding accounts for a longer period of time works in your favor, so don't rush to close your oldest accounts if you're trying to maximize your credit score.
- If you plan to shop for a car loan, a mortgage, or something else that might require a number of inquiries to your account, try to do it in a short period of time. The credit scorers do recognize the difference between a hunt for one new loan and a frenzied attempt to open as many credit lines as possible.
- If you have a truly checkered credit history, do apply for a loan or a secured credit card and make timely payments to begin re-establishing good credit. It might take a while, but you'll eventually be back in lenders' good graces.
Mostly, lenders and credit reporting companies want to see you be a good financial citizen. That means complying with the terms of your loans, keeping your debt in check, and making timely payments. In this case, punctuality definitely pays.
Our Credit Center has more information about improving your credit score. Or try a free 30-day trial of Motley Fool Green Light, our personal finance newsletter, which offers loads of money-saving tips.
For more credit Foolishness:
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- Six Tips for a Clean Credit Record