Use the Credit Crunch to Improve Your Credit Score

For the foreseeable future, new credit will be increasingly difficult to obtain. Whether your goal is a new credit card, auto loan, or a mortgage, you may have to wait until credit markets improve, you improve your credit score to an excellent level…or both. That said, it’s not time to ignore your credit score. In fact, it’s the perfect time to work on improving your credit score. Here’s why, and how.

Why It’s a Good Time to Improve Your Credit Score

The best ways to improve your credit score, assuming you already have a few open lines of credit, is to keep those credit lines open, pay them all on time, and pay down any credit card balances. The longer you do that, the higher your credit score will go.

The current credit market makes it difficult to do a number of things, including:

• Taking on new credit
• Asking for credit limit increases
• Moving balances to low rate balance transfer offers

In fact, those actions may lower your score. So right now, when these things are difficult to do anyway, maintaining a responsible payment history and paying down debt is not only the smart thing to do for your finances, it’s the smart way to improve your credit, too.

Other Ways to Improve Your Credit Score

If you only have one or two credit accounts on your credit report, opening a new line of credit like a credit card may actually improve your credit score over the long run if you pay it on time. Unfortunately, credit cards aren’t approving many people these days. And you want to avoid applying for several cards and being declined, because anytime you request a new line of credit, whether or not your approved, it appears as an inquiry on your credit report. If you have more than two or three of these within six months to a year, it can decrease your score.

What to do? If you seriously need to build your credit and only have one or two accounts, open a card that you know you’ll be approved for. Many applicants with credit scores about 600 can qualify for either the Orchard Bank or Household Bank credit cards. These cards don’t offer top-rate rewards programs or super-high credit limits, but they will add an account to your credit report that you can manage responsibly.

Use them once or twice a month and repay them in full for six months to a year, and you should be able to add a few points to your credit score. (Note: It’s a myth that you need to carry a balance to build good credit. In fact, the lower your balance on your credit card accounts, the better your credit rating).

Keep an Eye on Your Credit Score

As you work to improve your credit score, you want to make sure your efforts are paying off. To do that you’ll need to monitor your credit report and score periodically. You can obtain a truly free copy of each of your three credit reports (from Experian, TransUnion, and Equifax) once a year from annualcreditreport.com. This is the only site that is truly free, as required by federal law.

Although you should check these reports at least every year to ensure a.) you haven’t been the victim of identity theft and b.) your creditors are reporting account information accurately, these reports don’t provide any of your credit scores (like credit reports, you actually have multiple credit scores, even though FICO is the most commonly mentioned).

CreditKarma is a free service (supported by advertising) that lets you see your TransUnion credit score as often as you want. Alternately, you can enroll in a credit monitoring service for between $9 and $20 a month. These services will provide you with unlimited access to both your credit reports and scores. Our top pick is Credit Check Total from Experian. These services are good for consumers who are serious about increasing their credit scores in a year (to purchase a home, for example). For others, checking your scores once a year for free may be adequate.

It’s important to note that checking your credit score or report—whether it’s through annualcreditreport.com, CreditKarma, or another credit monitoring service, does not lower your credit score in any way. Checking your own credit is known as a “soft credit check”. When banks check your credit because you applied for a loan, it’s called a “hard credit check” and it will appear on your report and may temporarily lower your score.

What’s your story? Have you been successful in raising your credit score by 20, 30, or even 50 or more points? What did you do?

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