The number is a beast: How to raise your FICO score

We’re often told that it doesn’t matter what others think of us. This may be true in general, but when it comes to credit, reputation is everything.

If your credit score is too low, you will pay higher interest on your loans—if you can get a loan at all. Indeed, a low credit score means you may not be able to buy a house or make other large purchases.

For this reason, it’s crucial to know your credit score and to do everything you can to raise it.

The FICO score

The most commonly used credit score is calculated by the Fair Isaac Corporation, which is why it’s called a FICO score. Fair Isaac bases your FICO score on your payment history, the total amount of your debt, and how many open debt accounts you’ve got.

A FICO score of less than 580 reflects no credit or damaged credit, and it is unlikely that you’ll qualify for a loan with reputable lenders with this score. A FICO score of 580 to 669 is average, while a score of 670 to 739 is average. A FICO score of 740 to 799 is excellent, while a score above 800 is exceptional.

If your FICO score is 740 or above, keep doing what you’re doing. If it’s less than 740, it’s important to bring your score up if you ever hope to qualify for a mortgage or a car loan. (It’s possible to get a loan with a low FICO score, but the interest rate will be high.)

Checking your credit

Once a year OR anytime you’ve been declined for a loan, you’re entitled to request your credit report free of charge from the three major credit reporting agencies: TransUnion, EquiFax, and Experian.

If you plan to apply for a loan in the upcoming months, it’s important to get these reports now so that you’ve got time to review them and correct any errors. You don’t want to be surprised when you’re shopping for a home or car.

Go to www.experian.com, www.transunion.com, and www.equifax.com to request your reports. Do NOT request your reports through any other source. These other sources charge money for something you are entitled to receive for free, and they may be scams or try to sell you unnecessary financial products.

In most cases, you can request your credit report online and get it almost immediately.

Correcting errors

Step one is the easiest: Once you get your reports, read them carefully for any errors. Errors are common: A study by the Federal Trade Commission found that 26 percent of reports had an error that negatively affected the credit score.

For example, maybe your credit card company has reported that you were late on a payment when you were not. Perhaps your report shows an open account that you closed years ago.

If you see an error, contact the credit bureau that issued the report. They’re required to investigate, to review your documentation, and to correct the errors.

Once you’re sure your credit report is accurate, it’s time to tackle the bigger issues.

Pay your bills on time

This sounds obvious, but of course it’s where most people get into trouble. You can’t change the past, but if you begin to pay all of your bills on time, your credit score will begin to rise almost immediately. Older late payments have a smaller impact on your score than more recent late payments.

In particular, try to stay current on your credit card payments, as these can have the biggest impact on your FICO score. For example, if you are more than 90 days late with a single credit card payment, it can damage your credit for up to seven years.

Do everything you can to get current and stay current. Use tools such as automatic payments and calendar reminders.

Try to pay off credit card debt

The ratio of how much debt you owe compared to your credit limit affects your credit score. For this reason, it’s important to carry as little credit card debt as possible and to pay as much as you can toward the balance each month. Obviously, the worst practice is to max out your credit cards and pay only the minimum payment each month.

Don’t close old accounts

For the same reason, don’t close old accounts (as long as they’re not costing you money). When you close old accounts, it limits the amount of available credit you’ve got. As stated above, you want as little debt as possible compared to your available credit limit.

Limit new accounts

Whenever you apply for credit, it affects your credit score—particularly if you are declined. It’s tempting to apply for new credit cards or department store credit cards (particularly when they pester you to do so every time you’re at the register), but resist the temptation.

Whenever you apply for credit, the lender checks your credit. This is known as a “hard inquiry.” Too many hard inquiries and your FICO score goes down. (Plus, you’re trying to spend less money, so new revolving credit lines are a bad idea.) Hard inquiries stay on your credit report for two years, so take care to limit these.

Work with collection agencies

If you’ve got delinquent debt on your credit report, and these debts have been turned over to a collection agency, you can use this to your advantage.

If you can afford to pay the entire balance, contact the collection agency and offer to pay off the debt in exchange for the collection agency’s removing the debt from your credit report. This is called “pay for delete,” and it can raise your FICO score significantly. In addition to the collection agency’s promise to “pay for delete,” be sure to get a “pay for delete” letter for your records.

Ask for forgiveness

This doesn’t always work, but it’s worth a try. If your credit report shows a late payment or two, ask the lender if they’ll have the late payment notification removed. If you’re a valued customer and you’ve paid mostly on time, the lender may agree to do this simply to keep you as a happy client.

Should I become an authorized user?

I see this “tip” quite often, but it doesn’t seem worth it to me because it’s terribly risky.

If you know someone with better credit than you, such as a parent or a significant other, you can ask to be added to their credit card account as an authorized user. You get your own credit card on the account, and you can make purchases with the card.

Your credit score rises a bit because your available credit has increased, plus you’re demonstrating that someone will give you access to their credit.

I’m sure you can see the risks involved here. First, if your credit is bad, perhaps you’ll use your new credit card and plunge your benefactor into debt and damage his or her credit along with yours—to say nothing of the damage to the relationship. Second, if your benefactor defaults, you’re liable for his or her debt—and these late payments and defaults will damage your credit as surely as if you had defaulted on your own.

While this tip theoretically can raise your FICO score, I don’t recommend it and I’m surprised that any financial adviser would.

It can be discouraging and scary to order your credit reports, but if you face the problem head-on and do the hard work of repairing your credit, it’s worth it.