Build a Better Credit Rating in just 6 to 12 Months

Credit can seem like such a huge deal that you might not even know where to start when it comes to building or, in many cases, rebuilding your credit score. Strip mall lenders make one claim, and followers of radio personalities counter with other tips. Credit repair companies promise to build your credit fast but for a price. Credit card companies deny your application saying you don’t have enough credit history or you don’t have a good enough score, so it feels like a CATCH-22. How are you supposed to build your credit history or your score if you can’t get a credit card?

Which credit-building steps can you do on your own for free that will fix your FICO score?

Knowing how to improve your credit score will help keep your finances in the right place. You already know your credit score impacts your ability to qualify for new loans and credit cards. You also probably know your credit score affects the interest rates on those loans and credit cards. However, many people don’t realize that your credit also influences other decisions, such as insurance rates, the cost of setting up your utility services, the cell phone plans and devices you qualify for, apartment applications, rental down-payments, and even the ability to land a new job. If your credit rating has taken a hit recently and you want to increase your score, the tips and steps below will help improve it within months if not weeks, and without fees. You never know when you might need a service that requires a peek at your credit profile. Some of these suggestions can take months to reflect in your credit score, so getting started now will serve you much better than waiting until later.

1. Fix Any Errors on Your Credit Report

The first and fastest step you should take to improve your FICO or VantageScore is to pull your free credit reports, analyze the information reported by all three of the major consumer credit reporting agencies or CRAs (Experian, Equifax, and TransUnion), and dispute any errors you discover there.

You can get free copies of your credit report through the only federally-authorized site at AnnualCreditReport.com. As noted there, federal law guarantees your right to view your credit report at least annually.

Typically, you can get one free report from each of the three CRAs every twelve months. However, during the COVID-19 pandemic, these CRAs agreed to offer free credit reports weekly instead of annually through April 2022.

Why should you worry about checking your credit reports? You might assume the information reported by your creditors to your credit history is correct and updated. However, errors have always been commonplace on credit reports. Various studies place the rate of credit errors between one in four reports for trivial mistakes and one in twenty for significant problems.

Many of these errors could negatively affect your credit rating, possibly even lowering your score beyond what most lenders would consider acceptable. To correct errors reported on your credit report, start by submitting a dispute on the home pages of each credit bureau listing the inaccurate information. The process takes about five to ten minutes and costs you nothing.

You can dispute information online, ranging from inaccurate balances and payments to unrecognized accounts and outdated loans (older than seven to ten years). If you want to dispute transcription or spelling errors of your name or addresses, you can do that too, but you may need to do that by mail.

Once you submit a dispute, the CRA then forwards the information to the creditor in question. That creditor has up to 30 days to respond to your dispute. If the creditor does not possess information to support their position (e.g. signed contracts, proof of payments), they may approve the dispute, at which time the CRA updates the information in your favor.

The creditor may also choose to not respond to your dispute at all. In such cases, the CRA will update the information in your favor after 30 days.

However, if the creditor believes they have proof to support the current data, they will reject the dispute within thirty days. In such cases, you will need to gather your documents and receipts and reach out directly to the creditor in question. Ask to see their proof and share with them your own until you can come to an agreement. As with all matters related to finances and the law, get all agreements and arrangements in writing.

2. Pay Your Past and Current Bills On-Time and Online

Of the 132 factors that go into your FICO credit score, many of the most significant have to do with the delinquent status of your payments. If you have missed a payment by more than 30 days, the creditor will report your payment as 30 days late, which will weigh down your rating. Late payments of 60, 90, or 120+ days will hurt your score even more.

While many late payments result from having insufficient cash to make your payment, far too many happen unnecessarily because the consumer forgot about the payment or because the payment got lost or delayed in the mail (less common but still too often).

If you still pay your bills by sending checks through the mail, you should consider switching to one of several automated payment options. When you mail checks, you cannot control the actual date the creditor will receive the payment. Plus, history is full of creditors who would delay processing received payments so they could then charge a late fee. Such practices are against the law, but that doesn’t mean they can’t still happen.

On the other hand, when you pay your bills using ACH (Automatic Clearinghouse or direct debit), you can ensure your payment is received on time. To set up an ACH with your creditor, you provide them with your bank’s routing number and your account number (the same information readily available on your paper checks).

If, however, you choose to take advantage of your bank’s or credit union’s online bill pay (OBP), you may run into the same problems as you have to send your checks by mail. In many cases, online bill payments actually get delivered by mail still, so you can’t control the timing of it arriving at your creditor.

Either method, though, eliminates your need to remember to send your payment month after month. You can set up your ACH or OBP to make or send the payment every month on the same day of the month.

With ACH, you can even request your creditor pay off your credit card balance in full every month. This requires more coordination on your part since you will have to make sure you have enough money in your account to cover your expenses from the prior month.

If the payee tries to deduct your payment when there’s no money available, you will likely incur an Insufficient Funds charge and may even see your late payment end up on your credit report as a missed payment. Or, if the payment goes through you could be charged an overdraft fee by your bank or credit union to cover the missing cash. That will have no direct effect on your credit score unless the account ends up going to collections.

3. Reduce Your Credit Card Balances 

Balances on your credit cards and loans play a huge role in determining your credit score. Surprisingly, revolving debt like credit cards can play a larger role in your credit rating than big debts like car loans, mortgages, and student loans.

Keep in mind that your credit rating serves one principal purpose: predict as closely as possible how likely you are to make your future payments on time or miss them. As it turns out, your ability to manage a credit card properly does a much better job at predicting your future credit behavior than do your payments on your home, car, or student loans.

Additionally, if you carry balances that are close to your account credit limits, your credit scores will suffer. Again, this makes sense if you remember the purpose of credit scores. The closer you are to your credit limit, the less wiggle room you have in case of financial emergencies, and the more likely you are to miss future payments.

To build your credit fastest, it is best to make a single credit card purchase each month (no scoring factors indicate any reason to believe multiple purchases will build your credit any faster) and then pay it off in full by your next statement due date. If you must carry a balance, make a strong effort to reduce the balance as much as possible. In general, the lower your account balances the better.

4. Pay Off Collection Accounts

Derogatory marks on your credit history, such as collection accounts, will have a strongly negative effect on your credit scores. It doesn’t matter whether they resulted from consumer spending or from a medical emergency, the reality is that collections indicate you are more likely to miss debt payments in the future.

Collection accounts remain on your credit reports for seven years from the time the creditor first reports the account as delinquent. This often occurs about six to seven months after missing your last payment.

You can minimize the collection account’s damage to your credit rating by paying down or, even better, off your collection account balance. Cleaning up any past debts may improve your credit score because it shows the credit scoring model and, subsequently, potential lenders that you are taking care of your financial obligations.

Interestingly, in cases where a low credit score results in more from multiple late payments than balances due on collection accounts, paying off small collection accounts will have much less positive effects on your rating than getting caught up on your late payments.

5. Avoid Applying for Too Many New Accounts

Many of the 132 factors influencing credit scores include the term “recently” in their description. In most cases, activity on accounts that have been established in the past few months or even a couple of years has a greater influence on your credit scores than older accounts. Again, this has everything to do with the reliability of this information in predicting your future credit-related behavior. This means that people who max out a brand-new credit card are more likely to miss future credit card payments than people with similar credit histories who max out a credit card they’ve had for 20 years.

Additionally, if you apply for multiple credit card or store card accounts or loans within a short period of time, such behavior can also indicate financial problems coming in the near future. For this reason, especially for consumers with minimal credit histories, each application can lower their score by 5 to 10 points (1% to 2% of the total score possible).

Consequently, you should avoid applying for and opening multiple new accounts within a short period of time. Two or three new accounts per year can be the max for most consumers. Another reason new accounts can hurt your score has to do with the general factor that older accounts on average help you more than newer accounts. Opening several new accounts can dramatically lower the overall age of your open accounts.

Instead, let the age of your existing accounts naturally see a slow improvement in your credit rating over time. Only open an account or two as needed and use those accounts to build up your credit by using them minimally and continuously making your payments on time.

One other train of thought around opening a new account says that it can have a positive impact on your credit by reducing your credit utilization ratio. However, besides the counterbalances of having newer accounts on your credit history, you can also do this by simply asking your current credit cards for a credit limit increase.

Conclusion

Following these 5 tips can help you improve your score steadily and quickly. Regardless of whether you are trying to improve a poor score to a good score or a good score to an excellent score, these strategies can help you to achieve your credit goals.

While your efforts over the next few months may take a while to boost your scores, it will likely be a lot quicker than waiting seven years until negative items fall off your credit report naturally. It will take a bit of elbow grease and patience, but it will be worth it in the long run. Your credit scores affect just about all of life’s major financial decisions and reflect your financial management history over the past decade.

Related Questions

How can I fix my credit within 30 days to buy a house?

Credit score models use data on your credit history to predict your future credit-related behavior. For that reason, they are all about patterns in your behavior and not a snapshot. To build your credit takes 6 months minimum though most need 1-2 years.

What are the fastest ways to build your credit?

The fastest ways to build your credit scores include having a family member add you to their credit card accounts as an authorized user, getting your utility accounts reported to your credit report (include Experian’s BOOST), and using a secured credit card prudently for at least six months.