What tips do you have for a person trying to increase their credit score in a short amount of time?
The first step would be to request a copy of your credit report and analyze it carefully for errors. In the case you do find erroneous late payments or incorrect balances on credit cards, dispute these issues with the credit bureau.
If your credit woes are entirely based upon fact, the road to repair is simple, but often difficult -- pay your bills on time and keep outstanding balances on cards low (or zero). If your debt load is high, consider contacting a debt consolidation company who may help you reduce your overall APR.
Only take on new debt if absolutely necessary -- e.g., if you need a car to get your children to school and to commute to your job, borrow as little as possible and make all payments in full and on time.
Ask for a line of credit increase from your credit card company/companies to decrease your overall utilization of total credit available.
Don't pay a collection that’s not yours, even if the balance is small. Make sure to get them deleted, otherwise they'll stay on your report for years. People often receive incorrect bills, demanding that small sums are owed, and think the best course of action is to just pay the bill to have it “go away.” The reality is that a small, but late balance can do the same damage as a large bill, and that removal is far superior to just paying it off.
What are some commonly held misperceptions about how credit scores are calculated?
The most common misconception I hear all the time is that checking your credit always hurts your score. The truth is that only a “hard” inquiry affects your score, which occurs when your score is checked in relation to an application for credit, such as a home mortgage or a new credit card. Checking your score online for yourself does not ding your score.
Another common myth is that your job and salary are part of the credit score calculation. Your ability to pay is not considered, only whether or not you do pay, and if you do so on time.
People also tend to believe that being debt-free will lead to a perfect score. This is untrue. Having lines of credit with low balances that you pay in full and on time will give you a high score, having no credit (and thus, no credit history) will result in a lower score.
Which are the most common mistakes people make when trying to improve their credit score?
One mistake people often make is to close credit cards they no longer want or need. This decreases your ratio of credit available vs. balance you owe, which can lower your score. If the cards have annual fees, you can usually “downgrade” the card to one with no cost. For example, if you're carrying a Chase Sapphire Reserve card and find that you aren't reaping enough benefits of the card to justify the high $450/year fee, you can downgrade it to a Chase Freedom Unlimited card that has no annual fee without actually closing the line of credit. This also lengthens the average age of your credit card accounts, which is positive for your credit score.
Disputing derogatory credit references on the credit reports that you are actually responsible for. Companies can charge you a lot of money to have these removed from your report, and your score will actually go up, but mortgage lenders will ask you to remove the dispute to get your “true score” before approving a loan. So, having these removed does not actually yield a positive outcome.
Which is the best way for a young person to build credit?
Get two or three credit cards, keep low balances, and pay them off on time. Use one for gas, one for groceries, and one for utility bills. If you have no credit history, you may have to secure a card against a checking or savings account to get started.