How to Build Better Credit

The number one key to better credit is to pay your bills on time. Creditors love people who can be counted on to never miss a payment. A steady record of on-time payments for 12 to 24 months can give your credit scores a significant boost. Many people seeking better credit look for quick fixes, but long-term approaches to managing finances generally offer the best results. You can build better credit on your own, or seek help from a nonprofit credit counseling agency. The agencies often offer free financial literacy classes.

Instructions

1

Get copies of your credit report--regularly. The reports are available for free from the website Annual Credit Report. It was established by the three credit bureaus to offer free reports as required by the Fair Credit Reporting Act. You are entitled to three reports every 12 months, including one each from the credit bureaus--TransUnion, Equifax and Experian. By ordering one every four months you can check your credit for free all year.

2

Review your current report for inaccuracies and delinquent accounts, such as accounts showing as past-due, charged-off or assigned to collection agencies.

3

Write a letter to the credit bureau at its address on the credit report to challenge inaccurate information. The credit bureaus sometimes make mistakes, and someone else's delinquent credit card account may be showing on your file. Clear that up by pointing it out to the credit bureau. Federal law requires the bureaus to correct inaccurate information within about 30 days of being notified.

4

Make payments to bring all your existing accounts current. Even one account showing 30 days behind can cause your credit scores to drop.

5

Resolve other negative entries including charge-offs, collection items and judgments. Charge-offs are delinquent accounts that were closed by the creditor because you stopped paying. Collection items generally are charged-off accounts that were sold to debt collectors. A judgment is a monetary award won in court after a debt collector wins a lawsuit against you for not paying your debt. These negative entries are very damaging to your credit, although their impact will lessen over time. Despite that, you should contact the creditor or debt collector for each account to work out a payment plan.

6

Pay down your existing accounts until you owe no more than 30 percent of your total credit limits. That's the level of credit utilization creditors like to see, according to "Businessweek" magazine. Maxing out your cards can indicate that you are too reliant on credit. Also, the website Bankrate says you should keep your total credit limit to no more than 20 percent of your household income. That means if your household income is $40,000 your credit lines should total $8,000 or less. That can be hard to do if you already have a home equity line of credit, which generally offers large credit lines. However, you should certainly try to stay within the guidelines with your credit cards and other unsecured debt.

7

Open new credit card accounts and never miss a payment--but don't add more credit than your household income can support. The new accounts, such as department store cards or credit cards, can help you add positive payment histories to your credit reports and lift your scores.