The fact of the matter is your credit score has a dramatic influence on your life. It could affect where you live, what you drive, who you date, and even where you work.
That said, it’s very important to strive for and maintain a healthy credit score, but what if your credit score is already low? Are there ways to bring it back up?
Yes, and I’ll tell you how, but first, let’s take a quick look at the main credit score factors.
What impacts your credit score?
There are several things that impact your credit score. Here’s a breakdown:
- Payment history — 35%
- Credit usage — 30%
- Age of credit — 15%
- Type of credit — 10%
- Credit inquiry — 10%
Payment history — How often do you make your payment on time. This should be 100%. Keep this number as high as possible. The credit agency wants to see on-time payments. This shows responsibility, and that they will get their money back.
Utilization — How much of your credit available is being used. Ideally, you want it as low as possible, but try your best to keep it under 30%. The credit agency needs to know that you don’t max out your credit limit. This, again, shows responsibility.
Age of credit — The older your credit is, the better. When you apply for new credit accounts, that lowers the age of your credit. Only apply for new accounts if it’s absolutely necessary.
Types of credit — The more diverse your credit is, the better. Having a couple different types of credit shows responsibility, as well as credit experience.
Credit inquiry — There are two types. A hard credit inquiry and a soft credit inquiry. A hard credit inquiry is bad for your score and can stay on your credit report for 2 years. A hard credit inquiry shows up when you apply for credit, like a loan or a credit card. A soft credit inquiry does not impact your score.
If you find errors on your credit report, call the agency and get those issues corrected. An error usually comes in the form of a derogatory mark.
A derogatory mark is a bad mark on your credit report. These are the most common derogatory marks:
- Late payment
- Account in collections
- Civil judgment
- Debt settlement
- Tax lien
These derogatory marks stay on your credit report for 7 to 10 years. An unpaid tax lien will stay on your report until it is paid.
Take care of past due accounts
If you have an account(s) that is past due, has been charged off, or is in collections, get those accounts up to date. These types of derogatory marks could hurt you forever and even prevent you from getting approved for future applications.
Pay on time
Credit agencies assign good scores to people they feel are responsible. The best way to show you are responsible is to pay on time. If you have trouble remembering to pay on time, you can do two things.
- Set your credit accounts to pay automatically. You can set it to pay the minimum, the statement balance, or the dollar amount of your choosing. Be careful here though, your minimum payment and statement balance will change when you make new purchases.
- Set reminders for yourself. If you don’t trust the auto pay method, or your payment amounts change frequently, just set a reminder for yourself a week before the due date.
Age of credit
Keep your old credit accounts open, and don’t open new credit accounts, unless you have to. Agencies like seeing old credit.
Reduce your debt owed
This won’t increase your credit score as quickly as some other methods, but it will be satisfying to see the amount you owe decrease.
There are a handful of methods for decreasing your outstanding debt.
- Snowball method — With this method, you pay down the debt with the lowest balance. You pay the minimum on your other debt and pay as much as you possibly can to your lowest balance. Once that balance is paid, you redirect your money to the next lowest balance. You build momentum by paying off debt “faster.”
- Avalanche method — With this method, you pay down the debt with the highest interest rate. You pay the minimum on your other balances and pay as much as you can towards your debt with the highest interest rate. After you pay off your debt with the highest interest rate, redirect that money towards the debt with the next highest rate. This method saves you money on interest payments.
This method and the next one, contradict a point I made above about not opening new credit accounts, but they could drastically improve the rate at which you pay down debt.
- Balance transfer — Open a credit card that has an introductory rate of 0% APR on incoming balance transfers. Look for one with a long intro period. Once that’s open, transfer a credit card balance with the highest interest rate. This method will save you so much money on interest payments, as long as you can pay off your balance before the 0% rate expires. The best rates and terms are available to those with good credit.
- Personal loan — Like the balance transfer, the best rates and terms are offered to those with good credit, so if you have less-than-desirable credit, this might not be a good option. You get a personal loan from a bank or credit union. The size of the loan would be equal to the total of your outstanding, high-interest debt. The institution then cuts a check to each creditor, which leaves you with one debt to pay off. The only way this makes sense is if the interest rate on the loan is lower than the average rate on your other debts.
Increase credit limits
If your biggest problem with your credit score is your utilization rate is crazy high, request for higher limits from the credit companies. The credit agencies like to see utilization rates below 30%, so you need to do what you can to get to, or below, that number.
Cut up your cards
You need to stop charging purchases to your credit cards. If you can’t trust yourself, you need to eliminate the temptation by cutting up your credit cards. This won’t eliminate the debt, but it will eliminate the chances of you digging yourself a deeper hole.
Open a secured card to reestablish faith from the credit agencies. You will put a deposit down to open the card and that will become your credit limit. Make small purchases every month and pay it off right away. Don’t carry a balance.
To protect yourself against identity theft and further credit destruction, review your credit score and various credit accounts regularly.
Having bad credit can really hurt you, but your credit does not have to stay bad. There are several, effective ways to bring your score up. Pay attention, pay on time, and be responsible!
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