Strategies for better credit

This article was excerpted from Dirty Little Secrets: What the Credit Bureaus Won't Tell You, which is available from our Entrepreneur Press bookstore.

When it comes to repairing or rebuilding your credit, this is definitely something you can do yourself. There are, however, legitimate credit counselors, financial planners, and accountants who can assist you in better managing your finances and in learning to be more responsible when it comes to managing your credit.
Strategy 1: Pay Your Bills on Time.
Although this strategy may seem extremely obvious, late payments are the most common piece of negative information that appears on peoples' credit reports and are often responsible for significant drops in credit scores. When it comes to loans and credit cards, it's vital that you always make at least the minimum payments in a timely manner each and every month, with no exceptions.
The impact on your credit report and credit score will be considerable if you're late or skip one or more mortgage payments, however, making late payments on other types of loans or defaulting on any loans will also have a disastrous impact on your credit score that will have an impact for up to seven years.
The benefit to having credit cards is that you can determine how much you spend using them, then decide how much you wish to pay back each month, as long as that amount is equal to or greater than the minimum monthly payment due. This allows you to budget your money and make intelligent decisions, based on your financial situation. Simply paying the minimums on your credit cards will keep those accounts from being late, however, the costs associated with that decision (in terms of fees and interest) will often be significant over time. Plus, this strategy will keep you from greatly reducing or paying off the debt.
One of the worst mistakes you can make, aside from making late mortgage payments, is having an account go to collections. This means that you've neglected to pay your monthly minimums or have skipped payments for several months and the account gets turned over to a collection agency. Once this happens, regardless of whether or not you ultimately make the payments or settle the account, your credit score will be negatively impacted for up to seven years.
Keeping your accounts from going into a collections status is a relatively easy process. If you can't afford to make the full payment due, contact the creditor and try to negotiate an alternative payment schedule. People who get themselves into financial trouble often tend to ignore the problems until they become huge legal problems. Simply by taking a responsible approach, paying what you can and working with your creditors, you can almost always keep your delinquent accounts out of collections, which will protect your credit and save you a fortune.
The easiest and most straightforward thing you can do to protect your credit report and credit score (or begin repairing it) is simply to pay your bills on time. It's that easy!
Strategy 2: Keep Your Credit Card Balances Low.
The fact that you have credit cards impacts your credit score. Likewise, your payment history on those credit card accounts also impacts your score. Another factor that's considered in the calculation of your credit score is your credit card balances. Having a balance that represents 35 percent or more of your overall available credit limit on each card will actually hurt you, even if you make all of your payments on-time and consistently pay more than the minimum due. If you have a $1,000 credit limit on a credit card, ideally, you want to maintain a balance of less than $350, and make timely monthly payments on the balance that are above the required monthly minimums.
Demonstrate (through your credit history) that you're actively reducing your balances, while properly and responsibly utilizing your credit cards. Depending on your personal situation, it could make sense to spread your credit card debt over three, four, or five cards, while keeping your balance on each of them below that 35 percent of the total credit limit mark, as opposed to maxing out one credit card. If you do this, make timely payments on each card and keep them all in good standing. Managing your credit card debt appropriately will not only keep your score from dropping, it could also give it a boost.
Deciding to spread your credit card debt among several cards might help your credit score, however, before adopting this strategy, calculate the interest you'll be paying and compare interest rates between cards. In some cases, you may save money by consolidating your credit card balances onto one low-interest card, as opposed to having that same balance spread over several higher interest bearing cards. Do the math to help you make the decision and take the action that's best for you.
Strategy 3: Having a Good History Counts, So Don't Close Unused Accounts.
One of the factors considered when calculating your credit score is the length of time you've had the credit established with each creditor. You're rewarded for having a positive, long-term history with each creditor, even if the account is inactive or not used. The longer your positive credit history is with each creditor, the better.
Knowing this, avoid closing older and unused accounts. If you have a handful of credit cards you never use, instead of closing the accounts, simply put the credit cards in a safe place and forget about them. Although you don't want to have too many open accounts, having five or six credit card accounts open, even though you only actually use two or three cards can be beneficial. Likewise, if you have a five-year car loan, for example, showing three, four or five years of positive payment history (with no late or skipped payments) will benefit you.
Strategy 4: Only Apply for Credit When It's Needed, Then Shop for the Best Rates on Loans and Credit Cards.
If you're in the market for a bunch of new appliances or other big-ticket items, it's common for consumers to walk into a retailer and be offered a discount and a good financing deal on a large purchase, if they open a charge or credit card account with that retailer. Before applying for that store's credit card, read the fine print. Determine what your interest rate will be and what fees are associated with the card.
Next, only apply for new credit if you absolutely need it. Applying for a retail store card you're going to use once or twice, when you could just as easily use an existing credit card, might not be the best idea. Applying for and obtaining multiple new credit cards (including store credit cards) within a several month period will be detrimental to your credit score. Unless you can save a significant amount of money on your purchase over time and can justify accepting a reduction in your credit score, don't apply for credit you don't actually need.
Strategy 5: Separate Your Accounts after a Divorce.
During a marriage, it's common for a couple to obtain joint credit card accounts and co-sign for various types of loans. Coming into the marriage, the information on each person's credit report and their credit score will eventually impact their spouse, especially when new joint accounts are opened or a spouse's name is added to existing accounts. Consolidating all your accounts once married makes record-keeping easier. If a couple gets divorced, however, this can create a whole new set of credit-related challenges.
First, understand that just because you obtain a legal divorce, it does not release one or both people from their financial obligations when it comes to paying off a joint account. As long as both names appear on the account, both parties are responsible for it.
As your divorce proceedings move forward, be sure to pay off and close all joint accounts, or have one person's name removed from each account, meaning only one person will remain responsible for it.
It will probably become necessary for one or both parties in the marriage to re-establish their independent credit. When doing this, start off slowly and build up your independent credit over a few years. Immediately applying for a handful of new credit cards, a new car loan and/or a new mortgage within a short period of time after your divorce won't help to improve your credit report and credit score. Try to spread out new credit card acquisitions and new loans by at least six months each.
In the event of a spouse's death, creditors can not automatically remove the deceased person's name from the joint account and make the debt the sole responsibility of the living spouse. It will be necessary to contact each creditor separately. In some cases, the widow or widower may need to reapply for the credit card or loan as an individual borrower. Keep in mind that several of the credit reporting agencies regularly update their records using information provided by the Social Security Administration. As a result, joint accounts that include someone who is deceased will be flagged when the creditors are notified.
Strategy 6: Correct Inaccuracies in Your Credit Reports, and Make Sure Old Information Is Removed.
One of the fastest and easiest ways to quickly give your credit score a boost is to carefully review all three of your credit reports and correct any erroneous or outdated information that's listed. If you spot incorrect information, you can initiate a dispute and potentially have it corrected or removed within 10 to 30 days.
Strategy 7: Avoid Excess Inquiries.
Every time you apply for a credit card or any type of loan, a potential creditor will make an inquiry with one or more of the credit reporting agencies (Experian, Equifax or TransUnion). This inquiry information gets added to your credit report and will typically remain listed for two years. For one year, however, the inquiry will slightly reduce your credit score. If you have multiple inquiries in a short period of time, this can dramatically reduce your credit score.
Keep in mind, when shopping for a mortgage or car loan, it's permissible to have multiple inquiries for the same purpose within a 30- to 45-day period, without those multiple inquiries hurting your credit score. In this situation, the multiple inquiries will be counted as one single inquiry.
Strategy 8: Avoid Bankruptcy, if Possible.
There are a lot of misconceptions about the pros and cons of filing for bankruptcy if you encounter serious financial problems. In terms of your credit report and credit score, filing for bankruptcy is one of the absolute worst things you can do. If your credit score hasn't already plummeted as a result of late payments, missed payments, and defaults, when the bankruptcy is listed on your credit report, you will notice a large and immediate drop in your credit score. Furthermore, that bankruptcy will continue to plague your credit report for up to ten years.
Strategy 9: Avoid Consolidating Balances onto One Credit Card.
Unless you can save a fortune in interest charges by consolidating balances onto one credit card, this strategy should be avoided. One reason to avoid this is that maxing out your credit card will detract from your credit score, even if you make on-time payments. Assuming the interest rate calculations make sense, you're better off distributing your debt over several low-interest credit cards. An alternative is to pay off high-interest credit card balances using another type of debt consolidation loan or by refinancing your mortgage with a cash-out option.
Strategy 10: Negotiate with Your Creditors.
Contrary to popular belief, your creditors aren't your enemies (at least they don't have to be). Your creditors are in business. The nature of business dictates that they earn a profit. When you don't pay your bills, that impacts a creditor's ability to do business and impacts its bottom line. Many creditors are willing to be understanding of difficult financial situations and short-term financial problems, especially if you openly communicate with them in a timely manner.