After struggling for years with credit issues, you’ve put a plan in place to develop a budget, pay your debts on time, and spend wisely. You’re doing all you can and you’re ready for a fresh start, but your credit score is still not where you’d like it to be.
Here are a few tips for getting an added boost to your credit score.
1) Ask for an increase in your credit line. Your credit utilization ratio — the percentage of available credit you’re using — accounts for 30% of your FICO score. By increasing the amount of unused credit, you can raise your score. However, before you do this, ask whether the issuer will run a credit check. Note that if your credit-card issuer requires a credit check before granting an increase, you could possibly lower your score.
When a potential lender requests a credit report (due to you voluntarily applying for credit), this is considered a “hard” inquiry, and it might cause you to lose roughly five points from your FICO score. If you have a short credit history (few accounts) and several hard inquiries have been made over an extended period of time, you’re more likely to lose a few points. But if you have a long credit history, and relatively few hard inquiries, you may not be affected at all. A “soft” inquiry, which is when you pull your own credit report, does not affect your credit score.
2) Check your credit report. It’s been said over and over by financial experts, but it’s an important piece of advice that many people don’t follow. In a recent study, the Federal Trade Commission found that as many as 42 million Americans have errors in their credit reports. And some who had credit reporting errors corrected saw their score change by as much as 25 to 100 points. If you haven’t seen your credit report lately, go to annualcreditreport.com to get it right now — it’s free.
3) Apply for a secured credit card. If you don’t have a credit card, perhaps due to discharging debt in a chapter 7 bankruptcy, you can rebuild your credit this way. A secured credit card requires you to make a cash collateral deposit with the issuing bank. This amount becomes your credit line. After you’ve made timely payments for about one to two years, you might be eligible for an upgrade to an unsecured card. But before you look into this option, make sure that the bank reports payments to all three of the major credit reporting bureaus (Equifax, Experian, and TransUnion). Try to find a card with low fees and favorable terms. For help finding a card that’s right for you, check out Bankrate.com’s handy list of secured credit card issuers.
4) Pay off your balances. Another way to increase your credit utilization ratio is to completely pay off your debt. In addition, having more available credit will cause potential lenders to view you as less of a credit risk.
A word of caution: If debt settlement is part of your “get-out-of-debt” plan, be aware that forgiven debt that is more than $600 is viewed by the IRS as miscellaneous income. Consequently, it will be reported to the IRS and you will receive Form 1099-C, Cancellation of Debt. The amount on this form must be included on your tax return as taxable income. That means that you’ll be expected to pay taxes on the forgiven debt. (However, there are some exclusions, such as debt discharged in bankruptcy and some mortgage defaults as outlined in the Mortgage Forgiveness Debt Relief Act). So keep an eye on your mail.