There may not be a more important "number" associated with you than your credit score. This seemingly arbitrary number has an incredible impact on your life. Whether or not you can buy a house, job prospects, car options, lease options, interest rates you pay and several other factors are all impacted by your credit score. Your credit score ("FICO"), is based on data compiled from the major credit bureaus (Equifax, Experian, TransUnion). The information that makes up your credit score includes payment history, amounts owed, length of credit history, type of credit and new credit. Given the importance of your credit score, it would make sense that the credit reporting agencies would tell you how your score is calculated. Well, shocker here.... they don't do that! It's your credit score, it profoundly impacts your life, but good luck figuring out the mystery of how that score is calculated (and how to improve it).
I've been helping people with debt issues for sixteen years now. During that time, I've learned a lot and made some great connections. Within my professional network are some of the best mortgage brokers, FICO pros and consumer credit professionals (I'm happy to put you in touch with these resources!). Based on my experience and advice from consumer credit professionals I deal with regularly, here are some tips and tricks on how to improve your credit score (beyond the obvious, "pay your bills on time"):
- Open up three unsecured credit cards or lines of credit. Not two... not four... but THREE. You should have exactly THREE open unsecured credit cards or lines of credit (Victoria's Secret, Barclays, Fingerhut, Tigerdirect.com, bank credit cards, etc.)
- NEVER go over 20% of the available balance on any line of credit. NEVER go over 20% of the available balance. NEVER GO OVER 20% OF THE AVAILABLE BALANCE (get it?)!
- Regularly use these lines of credit (never exceeding the 20%) and pay them off monthly.
- Diligently follow this plan for a year and you will see a drastic improvement in your credit score.
The above tips can help anyone improve their credit score. However, some people may have so much debt that following the above steps is just not possible. If you are overwhelmed with debt, the first step is to address your debt. Bankruptcy may be an option to help you move forward. Often people will tell me that they are worried that a bankruptcy will "ruin their credit score" when their score is already damaged. For many people, bankruptcy is actually the fastest way to repair their credit score. It helps you address the debt (discharge it) and THEN you can follow the steps above to quickly improve your score and move on with a FRESH START!
Consumer focused Colorado mortgage broker James Spray has an excellent blog post on establishing new credit after a Chapter 7 bankruptcy. You can access his post HERE.