A person's credit score is a numerical indicator of his past credit history. It is a number used by lenders to determine a potential borrower's ability and willingness to repay a new debt. The higher the credit score, the easier it is for a borrower to get a loan with excellent terms. Once a credit score is lowered by negative credit history, a few steps can be taken to help raise the score, or rebuild credit.
Check Your Credit Report
AnnualCreditReport.com is the only federally mandated website that allows individuals in the United States to check their credit report once per year for free. Use this site to check your credit report and look for errors. Each line item on the credit report lists the reporting credit agency or bureau. If there are any errors, contact the specific credit bureau (Experian, Equifax, or TransUnion) that lists the error to have that error removed. You may be required to provide documentation to remove the error. Please note that while your credit report will be free from this site, your credit score is not. A fee will be charged in order for you to view your credit score.
Pay Off Outstanding Negative Items
Look to see if there are any negative items listed on your report, such as judgments, liens or collections. Pay those items in full. Once they are marked as "paid in full" their impact will be less on your score. Also note if there are any loans or lines of credit that are currently overdue and listed on your report. Pay those up-to-date to lessen the impact of late payments on your score as well. There is no set formula for determining how much your credit score will rise based upon paying off outstanding negative items. The amount your score rises will be based upon your current credit, the mix of credit types you have, and the amount of time that your account has been marked "paid in full." The rise in credit score could vary from person to person and the credit bureaus keep the exact formulas for score calculation as proprietary information.
Pay Down Credit Card Debt
The lower your credit card balance in comparison to your credit limit, the less the impact on your score. Keep your credit card balance to less than 30 percent of its limit, even if you pay it in full each month, to lessen its impact on your score. Credit cards that are "maxed out" where the balance is close to the limit have a very negative impact on your credit score.
Set Up Automatic Payments
To avoid late payments in the future, and to avoid judgments, liens or collections, set up all loan payments on automatic drafts or payments each month through your checking account. This ensures that the bill is paid on time. However, make sure your checking account (or the account that the payment is drafted from) has enough funds to cover the transaction to avoid overdraft fees.
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