Credit scores are calculated by the three major credit bureaus-- Experian, Equifax and TransUnion--using a formula developed by the Fair Isaac Corporation. This score is intended to give lenders an estimate of how risky of an investment you are if they were to give you a loan. Credit scores take time to build so there is no overnight fix for a low score. However, there are a number of steps that you can take to start improving your score in the future.
Improve Your Payment Record
The single biggest component of your FICO score is your payment history, which makes up 35 percent of the score. Your payment history takes into account how well you have met your obligation to pay your bills over time. First, get any accounts that are delinquent current. The longer these accounts remain past due the lower your score will go. If you cannot make the minimum payments, contact your creditors and ask if it is possible to adjust your payments. Many credits will be willing to work with you because if you go bankrupt or default on their account, they will receive nothing. Finally, do everything in your power to make payments on time in the future. More recent payments are weighted more heavily than payments from several years in the past so your score can improve as soon as you start making on-time payments.
Curb Applications for New Credit
Each time you apply for new credit, an inquiry is recorded on your credit report. These inquires lower your score, more so for people with shorter credit histories than those with longer credit histories. Sometimes it may be worth it to apply for a consolidation loan that will allow you to pay a lower interest rate than you would if the balances remained on your credit cards, but simply shifting debt from account to account will not raise your score.
Do Not Close Old Accounts
Closing old accounts will not remove negative information associated with those accounts. Most information, positive or negative, stays on your credit report for seven years except for personal bankruptcies, which remain on your report for 10 years. Closing your account can also have a negative effect on your score because it is one less account on which you are making on-time payments and it reduces the amount of available credit you have. In order to close an account, you must have paid off the balance. For the sake of calculating credit scores, if you have no balance to pay, you are still reported as being current on that account, which helps your credit score. Also, the amounts owed section of your credit card takes into account the percentage of available credit that you are using. For example, if you have four credit cards each with a credit limit of $2,000, your total credit limit is $8,000. If you have balances of $1,500 on three of the cards, you would be using just over 56 percent of your credit limit. However, if you were to close the account that you are not using, your total credit limit would drop to $6,000 and your use would rise to 75 percent.
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