There are many reasons to start on the path to credit repair. The biggest reason is that credit affects you every day. With poor credit, you may not be able to get approved for new credit products like credit cards. It also affects the interest rates you pay on credit cards and loans, including mortgages, and can result in higher security deposits for rentals. Compared to a borrower with good credit, someone with poor credit can pay an average of $50,000 more in interest on a mortgage. Over an entire lifetime, you could end up paying over $200,000 more in unnecessary interest just because of bad credit.
Bad credit is regarded as any score below 560 on the FICO scoring system. Your credit score is determined based on a number of factors, including your payment history, credit utilization ratio and length of credit. There is no quick fix for your credit. Information that is negative but accurate (such as late payments and delinquencies) will remain on your credit report for 7-10 years.
The good news is that you can repair your credit score all on your own. There are steps you can take to start building a more positive credit history and improve your credit scores over time. It just requires a little bit of know-how and patience. If you build good habits over time, fixing your credit will be automatic and ongoing. Here are six steps towards building better credit.
1. Check Your Credit Report
To get a better understanding of your credit picture and what lenders can see, check your credit report. On your report, you’ll see your credit history, including any credit card debt, loans, and accounts that were sent to collection agencies and legal actions like foreclosures or bankruptcies.
Beyond that is creditor information, which makes up most of your reports. The information that’s used to determine your credit scores is broken down into five major areas:
- Payment history, which is 35% of your FICO score
- Credit utilization, which is 30% of your score, and shows how much debt you carry in relation to your credit limit
- Length of credit history, or credit age which is 15% of your score, and shows how long you’ve had active credit accounts
- Types of credit, which is 10% of your score, and shows the variety of your accounts
- Credit inquiries, which is 10% of your score, and shows the number of inquiries made to your credit profile
Not all credit issues though are about errors on your credit reports. So, the next step-whether you have to dispute errors or not-is to maintain healthy credit accounts.
2. Improve Your Payment History
Your payment history is the most important factor in your FICO credit score and accounts for 35% of most scores.
In addition to reporting the errors on your credit report, you should focus on paying overdue balances on your accounts. However, once a payment is beyond 30 days past due, creditors and lenders can report your account to the credit bureaus – which ultimately impacts your score and creditworthiness. The longer your payment is overdue, the worse it is for your credit. Late payments can stay on your credit report for 7-10 years, so it’s important to pay them off sooner rather than later.
Your scores also take into account the size and recency of your debt. The bigger your debt is and the more recent your missed payments are, the worse your score will be. To avoid the wait for a better credit score, maintain healthy accounts by bringing accounts current and paying debt off on time whenever possible.
3. Find Out When Your Issuer Reports Payment History
Even if you pay your balance off every month (and you should), if your payment is received after the reporting date, your reported balance could be high – and that negatively impacts your score because your ratio appears inflated. Call your credit card issuer and ask when your balance gets reported to the credit bureaus. That day is often the closing date (or the last day of the billing cycle) on your account. Remember that this is different from the “due date” on your statement.
So pay your bill just before the closing date. That way, your reported balance will be low or even zero. The FICO method will then use the lower balance to calculate your score. This lowers your utilization ratio and boosts your score.
4. Pay Down Debt Strategically
When you have multiple balances to pay off, there are two main approaches to take.You can either pay off the account that suffers from the highest interest rate, such as a card with a 14.5% APR before paying on a balance with only a 7% APR.
Or, you can pay off your account with the lowest balance first, so the balance no longer incurs interest. For instance, if you have a new credit card with a balance of only $400, it may be advantageous to pay that amount in full, rather than having continual interest built on that account. By paying off an account in a lump sum, you’ll also have one less account to think about and worry about. Of course, you’ll still want to make at least the minimum payments on your other accounts.
5. Don’t Close Older Accounts
The age of your credit accounts is another factor in your credit standing. It accounts for roughly 15% of most credit scores. It’s also a part of your credit utilization, which makes some credit better than no credit.
The age of your credit is calculated by looking at the age of your oldest account and the average age of all your accounts. If credit age is hurting your scores, you can’t really do much about it. You do, however, want to avoid closing your oldest accounts if possible.
If you’re racing to improve your credit profile, be aware that closing credit cards can make the job harder. Closing a credit card means you lose that card’s credit limit when your overall credit utilization is calculated, which can lead to a lower score. Keep the card open and use it occasionally so the issuer won’t close it.
6. Apply for and Open New Credit Accounts only as Needed
In some cases, applying for a new line of credit could give you a better credit utilization ratio since you now have a larger line of overall credit. However, be wary of applying for too many lines of credit.
Each time you apply for credit is listed on your credit report as a “hard inquiry” and if you have too many within two years, your credit score will suffer. Hard inquiries occur when you apply for a new credit card, a mortgage, an auto loan, or some other form of new credit. The occasional hard inquiry is unlikely to have much effect. But many of them in a short period of time can damage your credit score. Banks could take it to mean that you need money because you’re facing financial difficulties and are therefore a bigger risk. If you are trying to improve your credit score, it can be best to avoid applying for new credit for a while.
In general, a consumer with good credit can apply for credit a few times each year before it begins to affect their credit score. If you’re already starting with below-average credit, however, these inquiries may have more of an impact on your score and delay your ultimate goal of watching your credit score climb.
Still no luck? If you have a poor credit history or a lack of credit history, a secured credit card may help you repair your credit and raise your credit scores. These require a deposit that generally serves as your credit limit. If you don’t pay your bills, the card issuer can withdraw the deposit. You use it like a normal credit card, and your on-time payments help your credit. If you open one of these cards, it’s important to make on-time payments and keep an eye on your credit utilization. Choose a secured card that reports your credit activity to all three credit bureaus.
If your debts are overwhelming, creditors are less willing to work with you, and you can’t seem to come up with a payment plan on your own, consumer credit counseling is an option for getting back on track. If you’re interested in learning more about financial wellness, check out this blog post!
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