Improving Your Credit Profile

Since the method used to calculate the credit score is essentially just a complicated formula, one can change the score by causing changes in the variables that are important factors in the equation. There are several approaches:

Credit counseling
Various credit counseling organizations exist. Their services are often free of charge. Mortgage professionals caution that using a credit counseling service will negatively affect your ability to obtain a mortgage. In fact, many mortgage lenders consider credit counseling as bad as a bankruptcy.

Credit repair
Many for-fee credit repair organizations also exist. These organizations employ less standard solutions. Many websites recommend against using credit-repair organizations, claiming that their tactics are illegal. A typical example of an illegal credit repair approach is to obtain an Employee Identification Number (EIN) and use this when applying for a credit (it is the same length as a Social Security Number and is tied to your name in the same way). This is illegal however and a blank credit report might look just as bad as one with a derogatory item on it. Some credit repair organizations claim immense improvements in scores in very short periods of time. Costs may be high and results are not usually guaranteed.

Do it yourself
Though professionals may have useful advice, there are a number of ways to improve your FICO score. Because the exact formula is not known, the following suggestions are not guarantees, but nevertheless are likely to result in a higher (better) score:

Check credit reports for accuracy
The first strategy to pursue in improving a FICO score is recommended by every credit repair organization and credit bureau.

Get your free annual reports by going to the website AnnualCreditReport.com, by calling 1-877-322-8228, or by mailing the Annual Credit Report Request Form.
Find any inaccuracies in your reports. Credit reports are notoriously inaccurate. Check all information, not just information marked "negative." Even incorrect neutral information may weigh negatively on your report. For example, if your credit limit is stated incorrectly low, it will appear that you are using a higher percentage of your total capacity. This will lower your score.
Dispute these inaccuracies immediately. You may dispute with the creditors directly or with the bureaus. Creditors tend to have live operators while bureaus do not.
Many sources recommend filing disputes with bureaus through certified "return receipt" mail. Disputes can also be filed on the credit bureau's websites, though the options are somewhat inflexible on these sites. This usually works for information that is genuinely incorrect.

Punctuality
It goes without saying that punctuality will improve your FICO score. Punctuality will not help in the short term, but over the course of a year, paying bills on time will increase your score by roughly 30 points, and, more importantly, will prevent your score from dropping.

Pay bills on time, since any payments more than 30 days late will affect the credit score. Note that a bill issued March 15 with a due date of March 31 does not become 30 days late until April 30, but if you have the means, pay earlier rather than later. A single late payment may result in a drop of over 20 points.
Later payments have increasingly worse effects on your score, so pay off late bills as soon as possible (after negotiating to have derogatory remarks removed from your report). Additionally, "collection" accounts are much worse than late payments. Accounts usually go into "collection" status after about six months of non-payment.
Set up as many automated payments as possible. This will help avoid neglecting to pay a bill in the future (be sure to maintain enough funds in the bank account making the payments and ensure that the address for each of your accounts is correct). Payments by internet are also much quicker and safer than licking a stamp and dropping an envelope in the mail.
Paying bills before the due date also helps your score because it will lower the total interest charged which inturn lowers your debt to credit limit ratio.

Cleaning up derogatory statements
Negotiate with collectors and businesses to remove any late payments or collections from a credit report. Often, collectors will happily remove notices off a credit report in exchange for prompt payment. It is important for consumers to obtain any agreement in writing, as once collectors have been paid off it is mostly impossible to have statements removed.
Be aware of the "statute of limitations" on any debt you are attempting to clear by dispute. Contacting a collector may be akin to awakening the proverbial sleeping dog. The statute of limitations is a period of time, set by a state's law, within which a creditor may file a lawsuit to enforce its legal rights. Once the period of the statute has "run," the creditor can no longer sue on the account. For example, you live in California, which has a four year statute of limitations on written contracts, and your last payment was due on April 20, 2002, but you failed to make that payment, it may be wise to wait until April 21,2006 to contact the collector to dispute, or attempt to negotiate a payment of a small amount to "settle the debt" and have them delete the account from the credit agency records. Additionally, if they know the statute has run, they may be less inclined to even respond to a dispute. If that occurs, the credit reporting agency must delete it from your record. Be aware, that in many states making even a small payment on the account or even, in some cases, promising to make a payment, may start the statute's time period all over again.
Businesses will usually remove negative remarks in exchange for more business. This works best when the credit branch of the business is closely connected to the sales branch, and when you are a significant customer. Businesses have little interest in preserving the accuracy of a customer's report for other businesses to review.
If you have federal student loans that fell into default, pursue loan "rehabilitation" policies. Labels of "collection" or "default" will be removed from a loan's history with regular payments over the course of a year. This needs to be arranged ahead of time.
Per-campus student loan programs will often make exceptions and remove negative remarks if you find the right person to talk to. A good justification for a late payment ("I never got the bill") never hurts, but remember that most excuses will not have legal merit (expect responses such as "It was your responsibility to pay, even if the bill never arrived"). Appealing to human decency and sense of campus community are vital. If lower ranking officials refuse to help, letters to higher ranking campus officials may find success.
Be polite. Nothing is gained through combativeness or disrespect.
When none of the above work, threaten and/or pursue legal action. Collectors and businesses have nothing to gain by reporting negative information about you. Even a minor legal interaction can cost thousands of dollars. Many businesses and creditors would rather remove items than deal with a lawsuit.
If the above approaches do not apply or fail, file disputes of negative marks on a credit report. Even if the negative marks are accurate, some creditors fail to respond to disputes in a timely fashion, which removes negative marks. Rather than pay the postage it takes to respond, some creditors disregard any communications regarding paid accounts. It is mail fraud to falsely dispute an item, but as long as you claim to believe an item was never late, feel free to dispute.

Decreasing credit capacity used
Decreasing the ratio of debt to credit capacity consists of two major approaches — increasing total capacity and decreasing your debt.

Increase limits on credit cards. The FICO formula weighs the ratio of balances to available credit, so if credit limits are increased while balances stay the same, this ratio drops and your score increases. If possible, try to increase limits without triggering credit checks, as a credit check may drop a score by a few points.
Use relationships with banks and other businesses. Banks will often remove late notations for valued customers. When a consumer is turned down for credit cards elsewhere, a bank will often provide a low-limit credit card. This card will increase capacity (decreasing the capacity used ratio), even if only by a small amount.
Consider secured credit cards. Secured cards factor into credit scores in fashion identical to unsecured cards. If a consumer opens a $1000 secured credit account, the resulting credit report will make it appear that someone has trusted that consumer enough to extend him or her credit, and increase your capacity by $1000.
Pay down the sum of all balances so that you are using the least total capacity. Using 30% of your capacity will trigger a reduction in score. 50% is more severe, and can cause a drop of over 10 points. 75% is a major red flag. A revolving balance of 0% has slightly less benefit than a small percentage.
Pay down each individual balance. It may make sense to move balances between cards so no single balance is at more than 30% of its capacity. The 30% line may be difficult to reach — try to increase credit limits, or at least reduce card balances to less than 75% of capacity. This contradicts the advice many credit companies give when trying to get new customers to transfer balances, managing line usage below these thresholds will lead to a higher score than consolidating everything into one credit line and maxing it out. This will require more bills to be paid each month, so requires extra work on the part of the consumer.
During mortgage refinances, you may be able to move some credit card debt to your home loan, sometimes by withdrawing equity.
Keep an eye on how student loans are reported. Student loans are notorious for being reported multiple times, making it look like one's monthly payment obligations are higher than they actually are. This can both help and hurt — a credit report will show more obligations, but if these loans are in good standing, you will show a good repayment history. If a loan is reported as paid late multiple times, make sure to remove the duplication.

Minimizing damage in difficult times
Negotiate with your creditors. Discuss your situation and express willingness to pay. If you can commit to a firm repayment schedule, creditors may be willing to skip reporting any delinquency.
If you have lapsed or failed to pay on time, sometimes the lender will forgive late fees and marks under certain conditions. Typically this implies you haven't abused this privilege, you've paid a reasonable sum, and requested that the late charges be forgiven. This may prevent them from reporting it to any agencies. Do your best to avoid this situation. If you know you can't make a payment on time, make arrangements with the creditor in advance as soon as possible.

Limit credit inquiries
Avoid causing inquiries to be posted to one's credit report. Credit score is affected by recent inquiries made against one's credit report for the purpose of evaluating an applicant for creditworthiness, including insurance. The credit score is not affected by obtaining a copy of one's own credit report, nor by "promotional" inquiries made by direct marketers such as credit card companies who send out prescreened direct mail offers, nor by "account review" inquiries made periodically by your own financial institution to manage the ongoing risk of your account. Only the action of applying for new credit or insurance creates a "hard" inquiry on one's credit report that affects the score. This typically drops a FICO score by roughly 5 points, which remains for as much as two years.
When applying for credit, refuse to allow the creditor to check your credit until the latest possible stage of your transaction. While shopping for a mortgage, generate your own FICO score and use that score in discussions.