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Small Steps to Improve Your Credit Score

September 2009

Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension

Many people are concerned about their ability to get credit in the future as a result of the ongoing “credit crunch.” Around the country, lenders have raised their standards for credit scores that qualify for the best interest rates. Want to improve your credit score and spend less to borrow money? Consider the following eight recommendations from financial experts:

  1. Check Your Credit Report - Many experts recommend contacting one of the “big three” credit bureaus (Experian, Equifax, and TransUnion) every four months to request a credit report. This way, you are accessing a credit report frequently to check for errors and evidence of identity theft. To check your credit report or download a PDF form to request a credit report via U.S. mail, visit You can also call 877-322-8228 and follow the telephone prompts to request a free credit report.
  2. PowerPay Your Way Out of Debt - Prepare a list of all your creditors and the outstanding balance, monthly payment, and interest rate for each debt. Then visit to calculate the time and interest savings that can result from accelerating debt repayment. As each creditor is repaid, remaining creditors receive larger payments until every debt is zeroed out. You can print out a PowerPay calendar that shows how much to pay each creditor each month.
  3. Know Your Ratio - Calculate your personal consumer debt-to-income ratio by dividing total monthly payments on non-mortgage consumer debts (e.g., credit cards, car loans, student loans) by monthly net (take-home) pay. For example, $400 in consumer debt payments divided by a $4,000 monthly net income equals a 10% ratio. Aim to keep your debt-to-income ratio below 15%. A ratio of 20% or higher is considered a “danger zone” and an indicator that someone has too much outstanding debt.
  4. Pay in Full - Charge only what you can afford to repay. If this is not possible, pay at least twice the required minimum payment. This one simple step can save hundreds, even thousands, of dollars of interest and years of debt repayment. For example, minimum payments of 3% of a $2,000 outstanding balance on a credit card with an 18% interest rate will cost $1,654 in interest and take 11 years to repay. Double the monthly payment to 6% of the outstanding balance and you’ll save $1,042 in interest and six years of payments.
  5. Use the Right Card - If you plan to carry a balance from month to month, use a low interest rate card. For purchases that will be repaid in full the following month, use a card with a 25-day grace period and cash-back features or other rewards. Match your credit cards to their intended use.
  6. Avoid Late Fees - If you are just one day late with a payment, you can be slapped with a late fee (often $35 or $39) and a high penalty interest rate (APR) of 30% or more. In addition, having late payments recorded in your credit history will lower your credit score. To avoid problems, pay bills promptly after they arrive, especially if using U.S. mail. Many creditors have a short turn-around period (less than three weeks) between the dates that bills are mailed and when payments are due.
  7. Practice the “Rule of Three” - Compare the features of at least three loans or credit cards and choose the best one for your bill-paying habits. Features to compare include APRs, grace periods, fees (e.g., late fees), balance calculation methods, and rewards.
  8. Avoid “Fringe” Lenders - Stay away from high-cost sources of credit including payday loans, car title loans, rent-to-own stores, and rapid income tax refund loans. In many cases, the interest rates (APRs) on these seemingly inexpensive short-term loans can exceed 400% when calculated on an annual basis!