Having a good credit score can pay off as it allows you to pay less interest on a loan and even get good rates for your insurance. Your credit score is actually a numerical representation of your creditworthiness.
Since it’s a number, it makes it easier for banks and other lenders to make decisions such as whether to approve or reject your loan application or whether to give you a lower interest rate on your home loan if and when they accept your application.
If your score is low and you plan to take out a loan soon, you need to take steps to fix your credit score. To start the process of fixing your credit score, you first need to understand how the scores are derived.
FICO score is one of the most popular credit scoring systems used in the U.S. and the formula for deriving your FICO score has actually been released to the public.
The FICO score is derived from different categories and the biggest component of your FICO score—35% of it— is your payment history. The other components of your FICO score are credit utilization (30%), length of credit history (15%), and the type of credit in use (10%), along with new credit (10%).
If you will notice in the breakdown of the components of your FICO score, payment history, and credit utilization make up for more than half so these represent good areas to target when you want to fix your credit score.
What are now the key action steps that you need to fix your credit score?
The Consequences of Bad Credit
Getting a bad credit record isn’t the end of the world, but if you wanted to borrow money – or do certain other things – in the future it could stand in your way. Credit records stretch back six years, so if you’ve had a problem with credit, fallen into arrears, and/or had to enter a debt solution, getting credit could be more difficult for that time.
Obtaining credit (and how much it costs) could be affected by your credit record. This includes:
- A credit card – you may not be able to get a credit card, or you may find you’re charged a higher APR (Annual Percentage Rate) than someone with a better credit history.
- A loan, a mortgage, or a remortgage – you may find that banks or other financial institutions are not prepared to lend you money if you have faults on your credit record. Or, they may lend to you, but charge you a higher rate of interest than people with better credit histories.
- An overdraft – you may not be able to get a bank account with an overdraft. However, that isn’t necessarily a bad thing: the possible benefits of a bank account for bad credit are that you can’t get into debt with an overdraft, you may not be credit checked and you could still use Direct Debits and (in some cases) a debit card.
- Store credit – If you apply for a store card, you may be credit checked, and a store can refuse to extend you credit if they believe there is a real risk you won’t repay it.
Obtaining credit is not the only thing that could be affected. You may find other financial matters are affected by your credit record. These include:
- Insurance companies may decide what they charge for your premium based on your credit score. Therefore, you may find you are charged more for insurance if your credit rating is poor.
- When you apply for mobile phone on a contract, the phone company may credit check you. People can be turned down for a mobile phone contract based on their credit record.
- Certain companies will credit check job applicants, particularly in the financial services sector. You cannot become a company Director if you have a history of bankruptcy – but even less-severe credit problems, such as CCJs (County Court Judgments), could still impact a person’s ability to get a job.
While there are many problems you could encounter with a bad credit record, there are things that you can do to repair the situation. For instance, if you’ve had a problem paying things on time in the past, it stands to reason that paying bills on time in the future would go some way to repairing your credit profile.
Your credit score could also be affected if you moved home ‘too frequently’, changed jobs too frequently, or applied to borrow money too frequently over a short period of time, all of which you may be able to avoid.
Finally, each lender, or financial institution, has its own set of rules about who they lend to and what they will charge for it. That means that even if a lender did turn you down, you could have more luck elsewhere.
What Make Your Credit Score Drop?
Credit scores can easily drop because of financial difficulties, errors or misunderstandings. Low credit scores can increase insurance rates and make home ownership nearly impossible. They can even affect the ability of a person to get an apartment or a job.
Fortunately, there are ways to repair bad credit. Few tips will help anyone to repair and raise personal credit scores so they can buy that house and have the future they want.
1. Keep Credit Card Balances Low
Credit card balances should be kept as low as possible. This means paying down existing debt and not using the cards for every expense. Low balances increase the amount of available credit. This lowers the debt to credit ratio. Lower ratios will gradually improve credit scores over time. It is equally important to never charge credit cards to their limit since this will reduce scores.
2. Pay Down Your Credit Cards
Since credit utilization accounts for 30% of your FICO score, you can improve your score by paying down your credit cards and keeping your balance to a good level. If you have multiple credit cards, you can prioritize paying down the one closest to its credit limit.
If you’re trying to pay down your credit card, it wouldn’t help you if you charge more purchases on it as this would increase your balance on the card. Prioritize paying down your credit card bill and pay with cash for now as you try to bring down the balance on your card.
3. Ask for an Increase on Your Credit Line
Another way to address your credit utilization ratio is to ask your lender to increase your available limit. This will improve your credit utilization ratio but don’t take this as a license to charge more on your card. Remember, the goal is to keep down your balance and keep it way below your credit limit.
4. Get a Secured Credit Card
Anyone who cannot qualify for traditional credit cards or loans should get a secured credit card. Secured credit cards require an initial cash payment equal to the credit limit. Using the card and making consistent payments will repair and increase credit scores. Secured cards work just like any other credit card. This is often the only option for people who have very bad or non-existent credit.
5. Keep Accounts Open
Up to 15 percent of a credit score is determined by the length of time accounts have been open. This includes bank accounts and credit card accounts. Closing an account that has been open for years will reduce credit. Keeping the accounts open will slowly increase scores as time goes on. Accounts open for years will improve credit scores even if they are rarely used or never used at all.
6. Never Make Late Payments
One of the most damaging things to a credit score is a late or missed payment. This means payments to credit card companies, utility companies, and any other regular account. A single late payment can undo all the increases made to a credit score over previous months.
It is important to never make late payments. Budgeting and automatic transfers can prevent late payments from occurring.
The payment history component of your FICO score considers the details of your late payments and takes into consideration into how late the payments were, the amount owed, the number of late payments, and how recently these occurred.
If you keep paying late on your credit accounts such as on your credit cards and installment loans, sit down and look at the reasons behind why your payments are late and address those reasons. You can’t fix a problem if you don’t know its cause to be honest with yourself and address the root cause of the problem.
If there’s a disconnect between the time you receive your money and the time your bill is due, you may want to get in touch with your lender to move your due date so that it matches your payday better, making allocation easier.
7. Contact a Credit Repair Service
A credit repair service can communicate with reporting agencies in order to have negative marks removed from a credit report. This will increase the calculated credit score. Services from reputable companies se a variety of techniques to research and remove problems on credit reports. Contacting a credit repair service is especially important if blatant errors are found on a personal report.
8. Fix Inaccurate Information on Your Credit Report
You should also request a copy of your credit report as your credit score is derived from information on it. If you see any inaccuracies, get in touch with your credit bureau and let them know of any errors you found.
If it still shows a loan that has already been settled, this can negatively affect your score so let the credit bureau know you have already settled that loan. Even worse is if they mistakenly put a bankrupt record on your report so that definitely needs to be corrected.
9. Fix Your Credit Report and Keep it Clean
If you’re able to fix your credit score and bring it up to a good level, then congratulations! Your task now is to maintain its good standing and you can do this by settling your credit card bill before its due date and not paying late on any of your credit accounts.
By repairing your credit and having a good credit score, you can get better interest rates and this can pay off immensely for you once you use it for big ticket items like getting a car or when you apply for a home loan to get your first home.
10. Unlock More of Your Credit History
Your credit report doesn’t just rely on whether you’ve held a personal loan for a long time, it also takes into account your payment history with private companies that you’ve been paying bills regularly to.
So, if you’ve been paying your electric bill or phone bill religiously for plenty of years now, call your electric company—or phone company—and ask them if they submit your payment history to credit bureaus.
If not, then they may be able to forward your payment history to the credit bureau so that’ll be a positive record on your credit report.
11. Diversify Your Credit
If you only have credit cards, consider getting an installment loan to diversify your credit limit and improve the “types of credit in use” portion of your FICO score. Remember that the point is to build a good credit history to get an installment loan that you know you can pay off and won’t add to your debt burden. Prioritize paying down your credit cards as your credit mix only makes up 10% of your FICO score.
More Ways You Can Repair Your Credit Following a Bankruptcy
The first thing to do is to remain calm and understand that it most likely took years to bring you to Bankruptcy and it will take some significant time to restore your credit.
If you are offered an unsecured credit card, take it.
This may surprise you but many people get an influx of credit card offers shortly after they file for Bankruptcy, just be careful because the interest rates are always A LOT higher than if you had not filed for the Bankruptcy. Creditors may consider you less of a risk since your ability to file Bankruptcy again in the near future is restricted by federal law.
Pay student loans on time.
If you have student loans they are not dischargeable in Bankruptcy so you must continue to pay them. You must make sure that you continue to pay them on time so that you do not receive a negative on your credit report as you are trying to rebuild your credit. Fix my credit, are you asking yourself how you can achieve this?
Don’t own a home then try renting.
Rent payments are usually not reported to the credit bureaus and therefore don’t count towards your credit score. Now in its credit profiles, Experian will include rental histories to get a more accurate reflection of consumers’ financial status.
The reporting network will now require that the landlords and management companies to use specialized software, the downside is not every landlord will be able to participate. When renting try and rent from a landlord that is participating.
Ask if they report to Experian Rent Bureau. Following these suggestions will amaze you on how quickly you can begin to repair your credit and improve your credit score.
Finding a negative record on ones credit report can be disappointing. When seeking debt relief more people are turning towards Bankruptcy, now is this the right decision or the easy solution. The issue now becomes after the Bankruptcy is over, rebuilding one’s credit.
With the prospect of the Bankruptcy remaining on their credit report for TEN years, future of taking out a loan declines, and higher interest rate loans are now is what is in place if they can get them.
Know What’s on Your Credit Report and How Long It Stays
Credit history and credit reputation can impact more areas of a consumer’s life than many understand. They know that it influences credit applications and interest rates on credit cards and loans, but someone’s credit rating can also influence job offers, insurance rates and more.
Every credit card or lending institution or other credit-related entity judges reliability by both credit score and the individual entries on a credit report. Do you know what can be listed and how long it must remain?
The Positive Information
Loans paid on time, credit cards with excellent payment records and legal judgments in your favor, if applicable to entry, can remain on your credit report forever. It’s a wise move to ensure that those entries stay your record with each of the three major credit reporting agencies in the United States.
Since is it up to you, the individual, to request removal of negative entries, below, upon expiration, don’t include any positive listing in removal requests! Those entries, whether ongoing or paid fully eons ago, are what bring your credit score up, and the more positive entries you have, the better off you are.
However, unless you can truly afford it, don’t apply for a loan or a credit card just to get another entry on your credit report. Spending money you don’t have to is never sound financial management.
If you cannot pay a credit card bill in full every month, or you cannot pay a loan in full early, always pay at least the minimum due to protect your credit health, regardless of the state or country in which you live.
The Negative Information
Late payments, non-paid loans or credit reports, bankruptcy filings and garnishments are among the most common types of negative entries on a credit report. If you did pay off a loan or credit card eventually but had a few late payments, you might consider whether the entry gives you a more good reputation for paying it off or if it drags your credit score downward.
Credit laws in the United States do have limits on how long negative entries must remain on your credit report, although not all entries enjoy the same expiration times.
The clock starts not from when the credit line started or when it first appeared on your credit report. The time clock starts from the date of last activity on the entry, and it expires according to the type of entry is it.
Entries that must remain on your credit report for 10 years include
- credit accounts paid as agreed with no late payments
- R1 (revolving) or I1 (installment) entries for late payments registered
- Chapter 7 or 11 bankruptcy, from filing date.
Those entries that must remain on your credit report for seven years from the date the account became due – and that’s an important distinction – include
- collection accounts
- late payment history so long as an R1 or I1 designation is not registered against it
- accounts not paid as agreed
- judgments against you whether satisfied or not
- tax liens paid
- Chapter 13 bankruptcy with a starting matching the filing date, not the completion date.
Free Annual Reports
US laws were changed last year: Every credit holder is entitled to one free copy of his credit report from each credit reporting agency. Take advantage of this free offering and monitor the status of your credit report health: The reporting agencies can reflect only what the creditors tell them to, and you are responsible for disputing entries or the expired negative entries.
Whether they are good, bad or indifferent, it’s your report, and it’s your responsibility to improve it and manage it.
Credit Repair Checklist
It’s a well-known fact that most of us don’t find much success with our New Year’s resolutions. And that’s okay because we’re always striving to do better and that’s what really matters. But here is a resolution that it isn’t too late to keep: repairing your credit.
You see, repairing your credit is something that can be done any time of year. It doesn’t matter if you’ve failed at all of your other New Year’s resolutions. The time is now, and there’s no better time than now to start repairing your credit.
To help you make sure you find success with this goal, I’ve provided a list of things to do to work towards repairing your credit.
Here is the Credit Repair Checklist:
1. Order Copies of Your Credit Reports
The first step to working to repair your credit is to order copies of your credit reports. According to law, you have the right to obtain copies of all three of your credit reports once every 12 months for free.
So start by order copies of your credit reports from all three credit bureaus. These credit reports will form the foundation for the rest of your credit repair steps.
You may also want to pay for access to your credit scores. Your credit scores can provide a great gauge for you to really track your results: you will be able to see how your score has improved with your efforts. Ordering your credit scores is by no means a mandatory step.
You can absolutely track your progress without your scores. If you choose not to pay for your scores, make sure you keep copies of the credit reports you’ve ordered so that you can reference them later on and see which items you’ve been able to have removed.
2. Find Any Errors
Once you have access to your credit reports, you will want to look over them very closely to find any errors. This can be a bit tricky because credit reports can be a bit tough to read and comprehend. So you may want to hire a credit repair company to help you out with this.
But this is absolutely a step you can do on your own: just look through your credit reports very carefully, looking for any errors in names, payment dates, payment amounts, account information, etc. You also can look for any items that seem to be misleading, biased, untimely, unverifiable, incomplete, etc.
3. Dispute Errors with the Credit Bureaus
The truth of the matter is that the majority of credit reports contain errors on them. Some studies have even shown that up to 80% of all credit reports contain errors of some form or another. So the odds are you will probably have some errors that will need to be disputed.
Send letters to the credit bureaus and inform them of the items that are inaccurate. Again, this may be a step that you might want to seek professional assistance with (from a credit repair law firm).
4. Track Your Results
You won’t know if you are seeing any type of success unless you track your results. So after you’ve received responses from a few of your disputes, you will want to order new copies of your credit reports.
Again it may be a bit easier to track your results by seeing if your score has improved. But if you don’t want to spend the extra cost on that, just make sure you keep track of the items you’ve disputed.
Then take a look at your new reports and see if those items have been removed. It may take different types of attempts to see results, but with some investigation and persistence, you should find yourself working your way towards much better credit.
The Jedi Master’s Guide To Repairing Your Own Credit
Are you buried under a mountain of debt the size of the Death Star? It’s not surprising, as many Americans have the same problem. Having too much debt and issues paying it back can pose an Empire-sized problem to your credit.
You don’t want to wait for it to get better. Instead, be a Jedi master when it comes to repairing and rebuilding your credit, to get yourself out of this rut.
Do you have a financial weakness the size of a womp rat? The first thing you need to do is to get a good look at the potential damage. This means taking the time to check your credit reports.
You have three reports from Equifax, Experian, and TransUnion. These bureaus collect and maintain information about your debts and repayment history. They are required by law to give you free access to your credit report, once a year. Get your reports and look at them carefully.
Train Your Brain
If your credit isn’t that great, there’s a reason. Thankfully you don’t need any Jedi mind tricks to gain control. If you are accumulating debt on credit cards or running out of money to pay your bills, take a few months and carefully track every expense, no matter how small. Try categorizing your budget into:
- debt payments
- monthly services
This will help you paint a much more accurate picture of where your money is going. Once you see where your problems lie, formulate a plan to cut back on your spending so you can focus on your debt.
Go on the Offensive
Unfortunately, your credit problems cannot be obliterated as readily as the Death Star destroyed Alderaan. Taking a proactive approach to credit repair takes time. First of all, you need to make sure that your credit reports are accurate.
It’s common to see inconsistencies between the three reports since some of your creditors will only report to one or two agencies. Inaccuracies can be a serious problem, however. When you find an error in a report, you should collect all the necessary documentation and dispute it.
If you have a lot of credit-card debt to manage, it’s going to take time. Follow finance expert Dave Ramsey, and start by paying off the credit card with the smallest balance. Then, once you’ve paid off that card, you can apply that money to the next card.
The average American needs years to pay off all their credit-card debt. But by snowballing your debt payments in this way, you can consolidate the number of payments you’re making and feel a sense of progress faster.
Call in the Squadron
Sometimes your credit is in need of more help than you can provide on your own. In that case, you might want to investigate consolidation loans or credit counseling services. Even the rebels always had support. But you should choose your friends wisely.
Look to your bank for advice on the best way to tackle your debt and credit issues. But if your credit problems are more serious, involving regular late payments, charge-offs or even bankruptcy, consider a company that specializes in credit repair.
Some companies can legitimately reduce your debts and stop the dings to your credit. Others are sham organizations created to take your money. Do your research so you can tell the difference.
Jedi’s would be the ultimate masters of their debt. They know how to collect intelligence, study religiously, attack their problems and ask for help if they need it. If you take the same path, your credit will be as clean as the sands of Tatooine.