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The (Long) Road to Improving Your Credit

"How to improve your credit" is one of those internet searches that happen all too frequently. There’s no magic bullet, but it can be done by making simple yet very effective changes to how you manage your debt. 

Before we get into how to fix your credit, let’s talk about why you might need to make it better. Notice I say need, not want. There are times when you do need good credit, but most of the time, it just doesn’t matter. Credit bureaus have you tricked. They’ve convinced you your credit score is the perfect measurement of your financial life. It’s not.

The reality is your credit score is a measure of how good you are at borrowing money. 

You will need a decent credit score if you are going to buy a house, car, or other large purchase on credit.
You will need a decent credit score if you are going to refinance your home or take out student loans.
You may even need a good score when you rent an apartment or if you open a store credit card — don’t open a store credit card! — but most of these events only happen a few times over the course of your financial life. If you’re making smart financial decisions, you’ll likely only need to open a line of credit no more than 10­-15 times in the course of your entire adult life.

So now that we’ve established there are really only a handful of times when your credit score actually matters, let’s assume that you’re reading this because you actually do need to improve your credit. It’s important to understand what makes up a credit score so we can figure out what to change to make the biggest impact.

This pie chart shows what makes up your credit score. As you can probably guess, the fastest ways to improve your credit score are to:
(1) improve payment history
(2) reduce amount owed. 

Where do we begin?

  • Let’s start with making sure there aren’t any mistakes on your credit report.
  • Get your free credit report at www.AnnualCreditReport.com
  • Review the entire report for errors.  
  • Incorrectly reported information is not uncommon and correcting these errors can lead to almost immediate results.
  • Dispute any erroneous information on the credit bureau website.
  • Pay your bills on time
  • This is a big one, since 35% of your score is determined by payment history.
  • Starting today, pay every bill on time and never miss a payment.
  • If you’re struggling to find room in your budget to make payments, check out our module on Finding Margin.
  • Reduce your debt
  • This is the second largest part of your credit score (30%) so your score will steadily increase as you pay down your debt.
  • We have an efficient strategy for attacking debt: The Momentum Method. Don’t scattershot your monthly debt payments, use our approach to see your debt decrease faster.
  • Wait. (Ah. Painful.)
  • If your credit score isn’t being negatively impacted by missed/late payments or significant outstanding balances, you might need to “lengthen” your history. The only thing that can boost this is the time in good standing.
  • Don’t close old accounts as it decreases your length of credit history.
  • If you have a hard time not using your credit cards, then closing an account is an acceptable thing to do. Your credit score will take a small hit but it will eventually recover. Your financial well being is more important!  

There’s no silver bullet to fixing your credit no matter what you hear on TV. It’s just a matter of making payments on time and reducing the amount of debt you have. Simple but extremely important steps will make the most progress in the shortest amount of time.

Good luck!