Financial Fact: Five Tips for Restoring Your Credit Score

by MMBB Financial Planning Specialist Keith R. Davenport, CFP^®, MPAS^TM, RICP^®

Maya saw her credit score as something out of her control, a background hum she ignored while telling herself she’d deal with it later—until the day her apartment application was denied.

That night, sitting at her kitchen table, she opened her credit report for the first time. The number stared back at her like a judgment reflecting years of avoidance: a forgotten medical bill, a maxed-out credit card from when her car broke down, late payments she’d brushed off as no big deal. It wasn’t irresponsibility so much as being overwhelmed and the belief that it was too late to fix.

There were no shortcuts or dramatic transformations to raising Maya’s credit score, just small, uncelebrated steps. In the first installment of this two-part article, we’ll share some of the steps that Maya took and that you can take to rebuild your credit score.

How to Raise your Credit Score
Credit reports play an important role in your financial life and we encourage you to review your credit report history regularly.  First, you need a basic understanding of the factors that affect a credit score. A credit score is typically based on five main components:

• Payment history – 35%
• Credit utilization – 30%
• Length of credit history – 15%
• Credit mix – 10%
• New credit – 10%

Free weekly online credit reports are available at www.annualcreditreport.com. Check for incorrect late marks, incorrect balances, or fraudulent accounts, and file disputes to correct any inaccuracies you find. 

Here are a few tips to help raise your credit score, keeping each factor in mind.

1. Always pay on time. Payment history makes up 35% of your credit score, so paying on time is one of the most effective ways to improve it. To make on-time payments easier:

• Set up autopay for each account
• Create calendar reminders either digitally or on a paper calendar
• Pay more than the minimum amount
• Top tip: Instead of paying around the due date, pay mid-cycle or a few days before the statement closing date. This can lower the balance that gets reported and help your score. Credit reports often reflect your balance at the end of the billing cycle and not the balance after you make a payment

2. Talk to your creditors

If you hit a rough patch and miss a payment or two, contact your creditors as soon as possible and explain the situation. Ask about:

• A goodwill adjustment (a one-time removal of a late payment from your report)
• Payment plans or hardship options that make payments more manageable
• Credit-building resources, like free counseling or budgeting tools

3. Know how medical debt may hurt your score

Medical debt can affect your credit score if it goes unpaid, is sent to collections, and exceeds $500. Medical debt under $500, paid medical collections, and debts less than a year old (from the first delinquency) generally don’t appear on credit reports or impact scores.

However, if you live in California, Colorado, Connecticut, Delaware, Illinois, Maine, Maryland, Minnesota, Oregon, New Jersey, New York, Rhode Island, Vermont, Virginia or Washington, medical debt may not affect your credit score. These 15 states have laws that prohibit the use of medical debt in credit reporting. 

4. Start an emergency fund

Once you’ve started to raise your credit score, the best way to protect it going forward is to plan for the next curveball. One way to do this is to start an emergency fund. Even a small, automatic transfer each payday can help you avoid relying on credit when something unexpected happens.

Watch for part two of this article when we’ll explore how to use your credit utilization to your advantage.

The information contained in this article is for informational purposes only. MMBB is not liable for any success or failure that is directly or indirectly related to the use of the information. Any inclusion of third-party links does not represent an endorsement by MMBB. The information contained in it does not constitute any financial, insurance, investment, legal, or tax advice.