Having an excellent score can get you qualified for premium rewards credit cards and loans with low interest that will take some time. Your credit score is that very important 3-digit number assigned to you. It can affect your life in greater ways such as buying a car, getting approved for a credit card, or buying a house. These great opportunities can make or break by your credit score. You can be sure you are probably having a low credit score when you find it hard to get approved for loans or new opportunities associated with credit.
The good news is that you are not the only one with a poor credit score. Although it takes time to improve your credit scores; however, the earlier you work on the problems causing the low scores, the faster your credit scores will increase. This can be achieved by taking healthy financial step including paying down debt, timely payment of bills, and so on. A credit score below 650 is considered to be poor while a credit score above 700 is considered to be good.
The average credit score in the United States as reported by Experian’s yearly state of the Credit report in 2018 was 675; so you are not alone in the task of improving your score.
This post aims to share some helpful tips to fix your credit and all you need to know about your credit score.
What is a Credit Score, and how does Credit Score Work?
A credit score is simply a 3-digit number that enables financial institutions such as bank determines how responsible you are with money, and how reliable you are if you at any time request a loan either for a car, a house or any other reason. This credit score in the U.S is FICO, which make use of an algorithm to award you scores on a scale between the ranges of 300 to 850. Although money lenders may have their standard of good credit score expected from an individual, however, this is the general guide:
- 300 to 629 – Bad credit
- 630 to 689 – Fair or average credit
- 690 to 719 – Good credit
- 720 and above – Excellent credit
There are 3 major credit reporting companies in North America which are Experian, TransUnion, and Equifax. To increase your chances of getting a loan, you would want to have god scores with all the 3 credit agencies. Each of these three agencies prepares its credit reports, and you can request a free copy of yours once per annum. Once you see what your credit score is with each agency, you can from there start to plan on improving them. Be prepared to begin the process of fixing your credit scores as we unveil how to go about it in this article.
Calculating Credit Scores
You probably have credit scores that are above dozens or even hundreds. That is because a credit score is calculated through a mathematical algorithm applied to the information in one of your three credit reports, and there are different algorithm being used by all lenders or other financial institutions to calculate the scores. Some of these scoring models are popular such as the FICO Score which is from 300 – 950.
There is no need to be hell-bent on having multiple scores because it is the same factors that affect the increase or decrease of your scores in different scoring models. According to Barry Paperno, a consumer credit expert, “the factor behind your credit scores going up or down is still the same; the only difference is the degree.”
Among the list of things being taken into serious consideration are your payment history on credit cards and loans, how long your accounts have been opened, the accounts types, the amount of revolving credit you use regularly, and how frequently you apply for new credit.
What are the Factors that Impact Credit Score?
The game explains that the major factors that influence your credit score are five. This includes how soon you pay your bills, duration of your credit history, the number of credit inquiries you’ve had over a period and the amount of available credit you are using. Wells Fargo, on the other hand, agrees that the two major factors are your payment history and the amount of money you are borrowing that is yet to be paid back; even though the other 3 factors still affect your credit score.
For instance, Game stated that your credit mix could enhance your credit score. Having different types of credit will quickly improve your score. This may include car payment, gas credit cards, bank credit cards, student loans, retail cards as well as other loans. However, she indicated that, to maintain a firm credit score, there are 2 important things you need to set your heart on – timely payment of bills and not exhausting all your available credit.
It is advisable only to make plans to use just 30% or less of your usable credit. For instance, having a credit card that gives you $3000 doesn’t mean you have to use it all. Rather, plan to spend 30% or less on payments.
For more understanding about factors that affect your credit score, discussed below are the five major factors:
- Payment history: Your payment history is critical in credit scoring as missing just one payment can hurt your score. When loan providers are considering you for another credit, they want to be certain that you will pay your debt promptly. 35% of your FICO score, which is widely used by the majority of loan providers, is being determined by your payment history.
- Credit utilization: This is calculated by dividing the overall available credit you are using by your overall usable credit limits. The amount of your usable credit you are using will be determined by this ratio and will also reveal how much you rely on cashless funds. Your credit usage will raise a red flag to creditors if it is above 30%. This 30% of your FICO score is being accounted for by credit utilization.
- Credit mix: Those with high credit scores carry a different portfolio of credit accounts always. The types of accounts and the quantity of each account you have are being considered by the credit scoring models. Loan providers can understand your debt history and how you settled them using credit mix.
- New credit: Although new credit holds 10% of your overall FICO credit score, it doesn’t mean your score will be improved by opening many credit accounts at once. This act could suggest to creditors that you are having trouble with your finance which makes you need much access to credit. Lee states that they advise consumers only to apply and open new credit accounts when needed. Your median account age will be reduced when you open new accounts, and this will greatly affect your FICO scores if you don’t have much credit information.
- Negative information: Negative information that may reflect in your credit history include foreclosures, charge-offs, bankruptcy, collection accounts, and late/missed payments. This negative information shows that you have loan-defaulted history and can turn loan providers off from approving your new credit application. Your entire credit profile and the record type will determine the effect that negative information will have on your credit scores. These negative records will dwell in your credit file for at least 7 years, and for this reason, it is best to stay clear of negative issues if possible.
9 Steps to Improve your Credit Score
Begin by checking online for your credit scores to improve it. The factors that are greatly affecting your credit scores will be disclosed to you once you get your credit scores. The work of the risk factors is to help you understand what you need to do to start improving your credit scores. Your creditors will need some time to allow them to report any changes you made and also to have it reflected in your scores.
It is generally known that some particular credit score factors are more essential than others. Part of the essential factors that influence your credit scores in most models is your level of credit utilization and payment history as discussed above. These two combined can amount up to 70% of your credit score, meaning they are so impactful. With time, credit score shows the patterns of credit payment, focusing on recent information.
Your credit scores will be improved in due time when you focus on the actions below.
1. Check/Review your Credit History
Go through your credit report from all three credit reporting agencies thoroughly for any wrong information. Make sure you check your credit score at least once per annum to be certain of its accuracy. You have the right to request a free copy of your credit report annually from each of Experian, Equifax, and TransUnion.
You can also request for the free credit report copies from a credit report website. Credit monitoring service is also a nice place to receive an update on your credit reports with extra monitoring for increased protection, so, go ahead and sign up. This feature is exceptionally great for those that feel insecure on their accounts and feels that it might be compromised.
You are to ensure there are no mistakes on the report once you receive the copies. Errors are generally common in credit reports, your credit score might be negatively affected by the mistake of having someone else’s poor credit history linked to your name. Your credit score will be affected by errors like judgments, unpaid accounts, collections, and so on.
You will have to contact the credit agencies via email, online, or phone to have the error resolved. Your error dispute will be easily resolved if there is backing evidence (such as the receipt for bills payment) that the report is inaccurate. If you have an identity theft issue, it is better to contact a credit repair company to help solve the issue due to the nature of the problem.
2. Pay your Bills on Time
Lenders are much interested in your reliability on bills payment whenever they review your credit report and request your credit score afterward. This is to give them a clue as to how you will be paying the potential loan. To improve this credit scoring factor, start by making your bills payment in due time as agreed. Your credit scores will be affected if you pay less than the agreed amount or you pay later than agreed.
All your bills are to be paid in a timely manner be it loans, credit card bills, as well as utilities, rent, phone bills, etc. You can also make use of tools and resources at your disposals, such as calendar reminders, mobile phone reminders, and the likes to make sure you pay your bills every month and in a timely manner. Bring any lagging payments to current as soon as possible, even though these payments have a less negative effect on your credit scores than recent ones.
3. Reduce your Debt
Another vital number in the credit score calculation is the ratio at which you utilize credits. It can be determined by adding each of your credit balances and divide the total by your overall credit limit. For instance, your credit utilization ratio will be 30% if you charge around $3,000 monthly and your total credit limit on all your cards is $10,000.
Check all the credit card statements you received from last year to determine your median credit utilization ratio. Sum each balance on the statements for each month on all your cards and divide by 12. The result you get is the average amount of credit you use monthly. Most people with good credit scores are those who have low credit utilization ratios, and lenders also like to see utilization ratios, not more than 30%.
Low credit utilization ratio proves to lenders that you have not used out your entire credit cards and that you also know how to manage credit properly. Credit utilization can be positively influenced by paying your debts and making sure your credit card balances are kept low, also by becoming an approved user on other person’s account but make sure the person uses credit responsibly.
4. Hire Professionals for Legal Documentations
This is the next step in improving your credit score. Hire a credit repair company to help use credit monitoring, item disputes, debt negotiation to fix your credit score. This part can, however, be skipped if you have only a few mistakes on the credit report you received from crediting report agencies or you already got the errors corrected.
Hire a legal service to help you trace documentation if you’ve much debt on many credit cards as this will help you in disputing all the mistakes entirely. Credit repair companies have much experience when it comes to negotiating with creditors, and they also have knowledge of the laws, limitations, and opportunities influencing your credit repair options.
Most creditors lose records of past debts over time. You will have your charges dismissed as there is no documentation backing them on the creditor’s file if you hire an attorney. It will take up to a month before the changes reflect on your credit score, but you will be amazed when you see how fast it rises from repairing the errors. Progress achieved at this level will inspire you to increase your efforts in improving your credit score.
5. Work on Past Due Bills
Your credit score can be greatly affected by an overdue account. When trying to repair your credit score, the first thing to do is to address the overdue accounts. Paying debt older than 2 years or in the collection will not have any impact on your credit score until the collection mark is removed from the credit report and this would take 7 years.
It is advisable to first pay off the debts on active accounts before tackling the ones in collections. It is also important to go for credit counseling if you are confused; this will help you understand your debt. You will have to enter into a debt management program after the credit counseling to pay your debts.
Debt management program has its ups and downs and is not the best choice for some people. It would be nice first to try a do-it-yourself method to improve your score. Taking new debts such as auto loans, student loans, credit cards, personal loans or mortgages is not what you need right now as you are busy fixing your credit score. Each time you apply for a credit card or take a loan, creditors always review your report. These reviews are known to be hard inquiries which reduce your credit score.
6. Go for a Secured Credit Card
This is how a secured credit card works: you deposit a sum of $1,000, and the bank holds the deposit as collateral. The limit on your new credit card is then $1,000. This card will then be used for a few months like a normal credit card, ensuring that the card is paid off each month. The effect this will have on your account is that it will rebuild your credit score by showing the bank that you don’t owe any debts.
A few months later, as your credit scores improve, you can then check if you are eligible for an unsecured credit card. Your $1,000 collateral will be refunded back to you when you switch to the unsecured credit card. Your credit will be built rapidly with this technique and also help you increase your credit score.
7. Pay Down Your Balances
You have to start paying down your huge balances once your accounts are up to date. Start paying the debt on your credit card by using one of the most popular debt repayment methods. Your credit utilization ratio is higher when you have less debt. The credit utilization ratio is determined by the amount of credit you’ve paid compared with your current credit.
Start by first paying accounts with high interests, and then work on reducing accounts with a high balance below your limit. The aim here is to reduce all your balances to below 30% of your usable credit. This will earn you a great credit utilization ratio. Creditors will also get to know that you have what it takes to pay back your debt when you pay down your balances, and this can aid your eligibility in the future.
8. Leave Old Accounts Opened
Understandably, you might want your poor credit history wiped after paying all the old debts, so it doesn’t reflect on your report anymore. However, those debt records may enhance your credit score if you completely pay them off as at when due. According to Nancy Bistriz-Balkan, Equifax’s VP of communications and consumer education, it is good to pay an account in full, but closing down an account is not a wise move, as it doesn’t have any positive effect on their credit score.
The responsible credit habits that creditor and lenders are looking for is that of an account with many history and record of timely payment of bills. Bad debts that can bring negative effect to your credit score are removed in due time automatically.
Ulzheimer says that bankruptcies can only be on your credit report for the maximum of a decade. Other payments and related non-payments such as foreclosures, collections, settlements, and repossessions can only be on your report for 7 years.
9. Be Patient
Your credit score cannot be improved overnight, and for this reason, you have to start a nice long-term credit behavior to realize a great score. The median age of information and the oldest account contained in your report are the two major factors that influence your score according to Ulzheimer. To expend those sections, you would need to have credit for about 20 years.
Trashing good credit score takes a short time while improving a bad score takes a very long time, says Ulzheimer. Make sure you make timely payment of balances habitual, as well as making sure your credit utilization ratio is kept lower and only apply for credit when required. Also, make sure those credit improving practices are shown in your credit score in the future.
What is the Duration of Rebuilding Credit Score?
If your credit report contains negative information such as bankruptcy, late payments, or unlimited inquiries, just make your bills payment and hold on. Improving your credit scores requires a significant amount of time. Bad credit scores have no instant repair. The reason you are making changes to your credit report will determine how long it will take.
Addition of negative elements such as collection or non-payment account to your credit report is sometimes the reasons for negative changes to your credit scores. Your credit scores will continue to be affected by these new elements until they reach their optimal level.
- Delinquencies will spend 7 years on your credit report.
- Bankruptcy may spend a decade on your credit report while other public record items will be on your credit report for 7 years.
- Your report will contain inquiries for 2 years.
You will discover that it will take some time before your credit can be rebuilt and improved; hence, the earlier you start now. Check your FICO score from Experian data to start improving your credit and also review each factor that is influencing your credit scores negatively. Then research on how to rebuild credit to positively enhance your scores. If your need is on correcting older credit mistakes, then consider learning about credit repair and fixing your credit.
How do Changes Affect Credit Scores?
It is important to understand how certain actions affect a credit score. For instance, will your credit score improve when you close 2 of your crediting accounts? Regardless of how easy the question is to answer, there are major factors to put into consideration. The information on your credit report is the basis on which credit scores are issued. Your credit scores could be affected by any change to your report.
When you close 2 accounts at a time, the number of active revolving accounts reduces and the total amount of usable credit as well. This brings an increase to your credit utilization ratio, also known as the balance-to-limit ratio, and this generally reduces your scores. Many items can be affected by just a single change in the credit report.
Providing a total accurate analysis of how a single action will affect your credit score is impossible. This brings about how crucial the credit risk provided with your credit scores are. They help you figure out the exact elements from your credit history that are influencing your score the most, so, you can take necessary action.
Other Information on Credit Scores
Comprehensive calculations are involved in credit scoring, and you will get to take full control of your credit when you have more knowledge on how credit scores and credit reports work. Knowing other few facts about credit scores and reports along with the important ones involved in credit scoring can be helpful.
Having negative information on your credit report can reduce your credit scores, as this information will dwell on your credit report for a particular period. For instance, late payments remain on your credit report for 7 years starting from the day you missed the first payment. It will remain on the report even after you pay off a collection account.
Bankruptcy, depending on how deep, can remain on your report for 7 to 10 years. Fortunately, all negative information will later remove itself from your credit report at the appropriate time. While this is ongoing, concentrate your time on other influential strategies, such as timely payments of all your bills.
Building your credit history doesn’t necessarily involve carrying a credit card balance each month. You can make payment for your credit card bills each month and still have a positive effect on your credit standing. Your credit scores will be greatly affected if you pay less than the amount you owe. Paying less than the original amount you agreed will hurt your credit. However, the negative effect of not paying the debt at all is greater than that of paying less than the agreed amount.
Frequently Asked Questions
Does paying off a debt that has gone to collections automatically improve my credit score?
Paying off debt that has already gone to collections will not necessarily improve your credit score. If the debt is showing up on your credit report as being in collections, you will need the lender to remove it for your credit to improve.
One suggestion is to offer a deal to the collections company. Agree to pay the entire debt (or as much as you can afford) in exchange for them agreeing to remove it from your report.
Ensure the agency is sending you a written agreement to that effect. Then you can expect to see an improvement in your score in the coming weeks.
I’ve heard that leaving a little balance on my credit cards is better for my credit score. Is that true?
It is false. The only time you should even consider leaving a balance on your credit card at the end of the month is when you are within a 0% APR period. Then you are not paying interest on the balance, which means it is not harming your finances.
In any other circumstance, you should clear your debt when it is first reflected on your bill, as only making a minimum payment would allow the credit card company to collect interest on the rest of the balance.
If I declare bankruptcy, will that remove my student loans from my credit report?
Student loans are a significant cause of debt and poor credit for many people who went to college or graduate school. Unfortunately, student loans that you took out from the government are NOT removed from your credit report at any time.
Even if you declare bankruptcy and many years pass, the student debt is still a part of your credit profile. The only way to remove that debt from your credit report is by paying it off.
Can I contest a mistake on my credit report?
If you notice a discrepancy on your credit report, it is possible to have it checked for accuracy. For instance, a financial institution may have mistakenly put you down as delinquent for a debt you have paid off.
The best way to proceed is to contact the institution in question. Provide proof that you completed the relevant payment, and request that they update the information they are reporting to credit agencies.
If I never plan on borrowing money, do I need to care about my credit score?
Many people assume that if they do not want to borrow money through a mortgage, credit card, personal loan or car loan, they can ignore their credit store. That is a mistake.
Your credit score is used by landlords to determine whether you are qualified to rent an apartment. If your score is too low, you may not be eligible to rent an apartment without a guarantor.
Some employers may even request your credit report as part of their background checks. It helps them determine whether you are responsible enough to handle working at their business.
Am I lowering my credit score each time I check my credit report?
No. When you are assessing your credit, you are performing what is called a soft credit check. Those do not have a negative impact on your score. Checking your score monthly is a good way to ensure there are no discrepancies on your report, and it will not negatively impact your score.
Only hard credit inquiries can impact your scores, such as the ones financial institutions perform when you are requesting a car loan, mortgage, or a credit card.
The best part of your credit report is that it is temporary. Given time (usually 7 years), negative items, such as late payments, judgments, collections, and bankruptcy cycled out. Start a good credit habit, such as timely payments of debt and paying down of debt so your credit score can jump to recovery. It is essential to make sure your credit score is good, considering its importance to your financial life.
The essential first step is to check your credit scores and report regularly. You will see a list of different factors affecting your credit score when you check from Experian. The best method to begin your credit score improvement is to focus on those factors.