Credit Repair

How can I fix my credit score?
Some simple steps you can take - without paying for "credit repair"
COMMENTARY
By John W. Schoen
Senior Producer
Updated: 12:50 p.m. PT May 28, 2007

Maybe it's the rising tide of spam offering "credit repair" but a number of readers have been asking lately how they can increase their credit scores. Before you go pay someone to give you advice you can get for free, check out these simple steps you can take to build better credit.

How would a person go about repairing their credit score when it is low?
— M.P., Bryan, Tex.

I'm trying to raise my credit score. Is it better to pay off credit cards and close them or leave them open with credit available showing?
— Tea C. Newark, Del.

Unfortunately, it's a lot easier to lower your score than it is it raise it.

But there are a number of things you can do to try to raise your so-called FICO score, named for Fair Isaac and Co., the company that created this credit rating system now widely used by lenders of all stripes for a quick read on your creditworthiness.

While the system is widely used, it’s far from perfect. Good lenders use it as a starting point, and each one has their own ideas about how high your score should be. They may also base their decision on other information not contained in the score — like how long you’ve lived at your current address or held your current job.

In general, you’ll pay higher interest rates the lower your score. In theory, the lower your score, the higher the risk to the lender that you won't pay the loan back. FICO scores range from 300 to 850; the median (average) score is 723. To get the best rates, you’ll usually have to have a score of at least low- to mid-700s.

Your credit score is compiled from information collected by the three major consumer credit agencies and each one calculates scores a little differently. So you probably have slightly different scores with each agency.

So the first step in raising your score is to make sure the information used to calculate it is correct and up-to-date. For that, you’ll need to get copies from each credit agency; you can get one free every year by going to AnnualCreditReport.com — a Web site set up under a federal law requiring the credit agencies who collect all this information on you to give you access to a free copy of your reports once a year. You’ll see a number of other pitches out there for "free" reports; when you get to the fine print, you have to supply a credit card, sign up for a "credit monitoring" service and then cancel after they've charged your account.

Once you get your report, look it over carefully. Are there records of past due payments you can show you made on time? Are there accounts still listed that have been closed? Worse, is someone else’s account or address listed under your name? One reason to check your report if to see if identity thieves have been opening accounts in your name. If you find any mistakes, write to the reporting agency and ask to have the information corrected. You should get a response within a few weeks; if not, give them a call.

OK, so now you know what your report says about you. Unfortunately, while the law gives you free access to your credit reports, you’ll have to pay to get your FICO score. Some lenders will provide your score when you apply for a loan. But if you want to know beforehand, you have to go to MyFico.com and pay $15.95. (You can sign up for a free 30-day trial once.)

While the exact formula for calculating your score is not public, the basics are available on the Fair Isaac & Co. Web site, along with guidance on how to raise your score. And while there are companies out there selling “credit repair,” you don’t need to pay to have someone else raise your score for you. Here are the types of information the formula takes into account, how much weight it gives each category, and what you can do on your own to raise your score:

Payment history: 35 percent
The single most important thing you can do is the simplest: Pay your bills on time. More than a third if your FICO score is based on your payment history: how often you’re late paying credit cards, car loans, mortgages and student loans. The later you are, the more you hurt your score. And closing an account with late payments after you’ve paid it off doesn’t get rid of the damage to your score any faster than leaving it open.

How much you owe: 30 percent
The next biggest chunk of the score is based on how much you owe. The simplest solution: Pay down your credit cards and other installment loans. Moving money from one card to another won’t help: you have to reduce the overall balance.

Credit issuers also look at how much of your borrowing power you’re using. Even though you’re keeping up with monthly minimum payments, if you’re at your limit on one or more cards, you’re at greater risk of getting in over your head — which will likely be reflected in your score. On the other hand, if you can get your bank to raise your limit, the extra headroom on your account should help your score.

Length of credit history: 15 percent
This one is hard to speed up; lenders want to see a track record of timely payments. Even if you have had credit for along time, a lot of newer accounts will lower your score. That’s why closing old accounts may reduce your score: it may shortens the average length of your credit history.

If you’re just getting started, stick with one or two accounts and gradually add more. If you can get yourself added to an account of a relative with good credit, that may help. And if you have no credit history, you may want to start with a secured loan or credit card. By keeping money in a savings account with the same lender — and using it to back your loan — you’ll lower the risk to the lender, get a better rate and start building a good payment history.

New credit: 10 percent
Opening up a lot of accounts all at once can also hurt your score — even if you pay all your bills on time and don’t carry big balances.

You may also hurt your score if you’re constantly changing cards and chasing a lower rate. Your score can also take into account how many inquiries lenders make to credit agencies asking about your credit. Too many request for information may mean you’re embarking on a borrowing binge. On the other hand, Fair Isaac says it doesn’t count inquiries form lenders who want to pre-approve you — without your approval. And shopping among several lenders all at once – without opening more than one account — also shouldn’t have an impact, according to the company’s Web site.

Types of credit: 10 percent
Most people have different kids of credit — credit cards, mortgage, car loan, student loan, etc. Open-ended credit — like a credit card is called revolving credit because it doesn’t have a fixed number of payments. A car loan or mortgage, which does, is known as an installment loan because when you finish the payments the loan is closed. Lenders want to see how you handle both kinds of credit. But opening more accounts won’t necessarily help offset a spotty track record of payments on existing loans.

I do not believe in credit cards and every online site I have gone to asks for credit card info. I don't have a credit card, don't want a credit card. So how can I get my credit scores for free?
— Connie S., Citrus Springs, Fl.

If you’ve never borrowed money from a bank or other commercial lender, you may not have a credit history. Which means you won’t need to check your score because you won’t have one.

But credit agencies keep track of more than just credit cards. You can still check to see if you have a credit history — for free — without a credit card. The sites that ask for credit card numbers are trying to trade on confusion about the process by signing you up for “credit monitoring” services for as much as $90 a year. You don’t need that.

The only thing you’ll need to provide AnnualCreditReport.com is your name, current address, Social Security number and date of birth. You’ll then be forwarded to the credit agencies Web sites one by one, where you can view your report online and print it out.

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