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10 tips for improving your credit

Credit scores are constantly changing in response to newly reported information from creditors and the passage of time.  Given that credit scores are one of the most important considerations for lenders, improving your score will save you money on a loan.  Here are some tips to improve your credit score:

1. Pay your bills on-time - Your recent account activity carries more weight than your past activity.  By paying your bills on-time you will improve your credit score.   To ensure that bills are paid on time, it is helpful to set-up automatic payments through your bank.  Many banks offer free online bill payment and it takes only a few minutes to set-up.  Once the payments are scheduled, all you need to do is review the monthly statements and make sure that you have enough money in your account to cover them.
2. Review your credit history regularly - Many things can happen to improperly lower your credit score.  Identity theft and inaccurate reporting of credit information are among the most significant.  Regular monitoring of your credit report will help you catch and correct inaccurate information so that when you apply for a loan, you will not have to pay expedited fees.  You may monitor your credit report free of charge by taking advantage of your right to receive a free credit report each year.  There are three national bureaus and each one is required to provide you with one free report each year.  If you request a free report every four months from a different bureau, then you will have free credit monitoring.   
3. Dispute inaccurate information - Correcting credit information can be time-consuming so it is a good idea to review your credit report well in advance of applying for a loan.  If you find inaccurate information on your credit report, then you should notify the reporting credit bureau in writing that the information is disputed.  Upon receipt of your letter, the bureau is obligated to investigate the disputed information.  If the information cannot be confirmed within a reasonable time, then the bureau must remove it.  Click here for a sample dispute letter.
4. Reduce your outstanding balances to below 50% - If your credit cards are at 50% or more of your available credit, then you can raise your score by paying all of your cards down to less than 50%.  You can do this by moving balances, or ideally, by paying down the balances.
5. Limit inquiries - Each time that you apply for credit, an "inquiry" is put appears on your credit report.  When there are a lot of inquiries, it means that  you are looking to increase the credit that is available to you.  This is a warning sign to lenders because it means that you are having financial problems or possibly over-extending yourself.  By limiting inquiries, you are able to maintain or increase your score.
6. Do not increase credit - if you are applying for a loan, then you should avoid applying for more credit.  Open lines of credit raise the risk that you will overextend yourself.  It is therefore a bad idea to increase your credit or make any large purchases (like a car) when you are applying for a home loan.   Increased credit lines will not improve your score.  Instead, they will probably reduce it.
7. Do not close older accounts - older accounts carry more weight than newly opened accounts.  Closing an account will actually hurt your credit score if it is an older account or because your outstanding balance is now a higher percentage of your available credit.
8. Use cash instead of credit cards - credit scores are affected by credit card balances even if you pay them off every month.  If you plan on applying for a loan, then it is a good idea to stop using your cards until the loan is funded.  Credit card balances will lower your score even if they are paid-off in full every month.  This is a result of the credit card company reporting on a given date that does not coincide with your payment date.  
9. Increase your credit limit - You can reduce the effect of outstanding debt by increasing your credit limit.  It lowers the ratio of debt to available credit which will have a positive effect on your credit score.
10. Defer large purchases - Defer large purchases such as cars or boats until after your loan funds.  Large purchases that are made on credit will increase your debt and limit your loan options.

Sample Dispute Letter

________________ (Date)

Name of Credit Bureau
Mailing Address of Credit Bureau                                                                                         
City, State, Zip

Attention: Consumer Relations

Dear Sir or Madam:

I recently obtained a copy of my credit report from your service and found the following item to be in error:  ____________________________________________ (copy disputed information).  This information is erroneous because _________________________________________________ ______________________________ (facts establishing that information is inaccurate).  I request that you investigate this item and respond to me within 30 days of your receipt of this letter, in accordance with the Fair Credit Reporting Act, 15 USC section 1681i.  For your reference, I am enclosing a copy of the credit report that contains the erroneous item.  According to Section 611 of the Fair Credit Reporting Act, your company must promptly delete any unverifiable, inaccurate, or outdated information from my credit report.

When your company has corrected the inaccurate information described above, please send a corrected report to me and to anyone else who has requested a copy of my credit file within the last three months.  In the event that your company does not respond to my request within 30 days, I will assume that you are unable to verify the information, which means you must immediately remove or correct the items in question.  Thank you for your prompt attention in this matter.

Sincerely,

______________________
(Print Name)
Social Security #: ______________
Date of birth: __________________
Phone number: ________________x