Reader Question: Better Credit Today?

Hi Stephanie,
I love your website and it’s really helped me take initiative of my spending and savings habits. I’m 20 and I have pretty awful credit. I finally got my credit score and it’s 520. I have two credit cards that will be paid off no later than December and I have a few things on my report that I’m disputing?
What can I do now to drastically improve my credit? I now have a job and once everything is paid off I just want to make a big change so I can be on the path to having good credit. Any suggestions?
Thanks,
Corey

Corey, this probably isn’t what you want to hear, but what you’re doing right now is exactly right, and there isn’t a whole lot more you can do. Improving credit is, unfortunately, a rather slow process. But you are on the right path, so don’t lose hope!

Let’s take a quick look at the five elements that make up a credit score, just to see if there’s anything else you might do. From the Wikipedia entry on credit scores:

• 35% – punctuality of payment in the past (only includes payments later than 30 days past due)
• 30% – the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
• 15% – length of credit history
• 10% – types of credit used (installment, revolving, consumer finance)
• 10% – recent search for credit and/or amount of credit obtained recently

Punctuality of Payment
This is the largest chunk of your score, so it’s very important. This includes more than just payments on lines of credit – any bill that’s more than 30 days past due can show up here. Be sure to stay on top of your utilities, cell phone, car payments, credit cards… all of it! If you have to pay something late, make sure you don’t let it get to 30 days past due.

Ratio of Debt to Credit
As the second biggest chunk, this is more important than most people think. Once you’ve paid off your credit cards, you’ll probably want to start using them again (without carrying a balance). This will help you establish a series of on-time payments, which is good for the “Punctuality of Payment” chunk above. However, you don’t want to charge too much, or else you’ll throw off this chunk.

Even though you’re going to pay your cards off every month, try not to charge more than 30% of your total credit limit – across all of your cards. Remember that last bit – it’s the total debt on all of your cards out of the total credit limit of all your cards!

Length of Credit History
There’s nothing you can do to boost this, and it’s probably not one of your strong points, since you’re only 20 years old. Thankfully, it’s only 15% of your score, so don’t fret over it. However, there are one thing you can do to make sure you don’t hurt it – that is, don’t cancel your oldest card, if you can help it. Unless it’s an awful card with lots of ridiculous fees just for having it, keep it around for as long as you can.

Types of Credit Used
At only 10%, this isn’t hugely important. You’ll probably eventually end up with a car loan and a mortgage to balance this out, but for now, it’s more important to focus on other aspects.

Recent Credit Inquiries
Yep – just asking for credit hurts you. But not much, and not for long. There isn’t a whole lot you can do here either, except for simply not filling out every credit card application that comes in your mailbox! 😉

You’re doing good by paying off your cards and making a commitment to improve your score. Just focus on keeping your debt-to-credit ratio low and making payments on time, and you’ll see drastic improvement.