A lot of people view credit score as just some background noise in a life filled with many other pleasurable pursuits. However, its relevance dawns on them when they want to make a significant purchase such as a house, car, or make an investment. Despite just being a mere three-digit number, credit score can majorly impact how people conduct business. Unfortunately, this goes unnoticed until an individual requires to get approved for a credit card, lease their dream house, or even apply for a debt consolidation loan. A good credit score ranges above 700, while a credit score below 650 is considered poor. It is utterly impossible to fix a bad credit score overnight—this is why borrowers should consider starting early to fix their credit scores. Fortunately for many, fixing a bad credit score is not rocket science. Below is a guide on how to go about fixing a bad credit score.
Acquiring a Credit Report
The first thing to do is getting a credit report. A credit report harbors essential information on where the individual stands as a borrower. It shows whether he or she pays their bills on time, what credit card or loans they have, and how much they owe them. A credit report also indicates if the person has ever applied or been sued for bankruptcy. Americans are entitled to a free credit report once a year from each credit bureaus. Luckily, in the US, there are three credit bureaus from which one can request a free credit report. The bureaus are TransUnion, Equifax, and Experian. The reports can be downloaded from the free federally mandated website; annualcreditreport.com. On exhaustion of the three free reports, a fee is charged to acquire more credit reports.
Reviewing the Reports for Errors
A person needs to review his credit report for any discrepancies that might have occurred. A large number of reports harbor significant errors. Approximately 25% of borrowers are denied credit applications due to errors in their credit reports. As much as building a better credit score is fundamental, finding the root of the problem is key in fixing bad credit. Errors to pay keen attention to include;
- Personal information mistakes- including name variations and aliases that are no longer in use. It is also very vital to verify social numbers.
- Errors in payment history- this includes claims of non-payment when payment was made.
- Negative public records such as bankruptcy, liens, and judgments that already expired or that are false.
- Outdated account balances and statuses- that indicate a bigger debt than what the borrower currently has.
- Alien accounts that are not linked or do not belong to the owner of the report.
- Fraudulent activities.
Disputing Any Mistakes Found
In case the individual establishes that errors were made on his credit report, they should immediately contact the responsible credit bureau to correct the mistakes. Legally, credit bureaus are mandated to attempt and resolve any discrepancies on a credit report. Application of disputing credit report errors can be made by contacting credit bureaus via email or phone. A person with credit report errors should contact the bureau that issued him with the report. Necessary documentation includes details of the erroneous account, proof of identity, and other documents to prove the mistakes. Contacting creditors before dispute application is another way the individual can attempt to resolve the issue quickly. The bureaus should respond within 30 days after receiving the request.
Making Payments to Past Due or Late Accounts
Credit bureaus only consider a payment due after exceeding 30 days. Payment of overdue accounts directly impacts creditworthiness and generally the credit score of a person. Lenders and creditors only report an account to the credit bureaus after defaulting debt for over 30 days. The longer the time after default, the worse it becomes for an individual’s credit rating. Considering that records of late payment can linger on a credit report for as long as seven years, borrowers must make an effort to make timely payments. Creditors often result in involving collection agencies to collect funds from defaulters directly. Records of accounts turned over to collection agencies are included in credit reports. This may further damage the credit score of the defaulted.
Paying Off Highest Interest or Lowest Balances First
Borrowers can utilize different criteria in prioritizing what balances to clear off first. They may choose to start clearing either the debt accruing the highest interest or the account with the lowest balance. By paying off high-interest accounts first, they quickly relieve themselves of the more significant burdens and are left with the smaller portfolios that are relatively more comfortable to pay off in time. A borrower may also choose to offset the accounts with the lowest balances, which translates to having fewer debt accounts to worry about. Paying off a balance with a lump sum ensures that the balance no longer accrues interest as the individual focuses on the rest of his debt obligations.
Increasing Credit Limits
Credit card utilization is another factor that weighs heavily on the credit score. The ratio of credit used to the amount of credit available makes a significant difference. A borrower should generally avoid maxing out on their available amount of credit. The lesser the portion of the credit they utilize, the better. To have a better chance of fixing a bad credit score, individuals should consider retaining more than 50% of their available credit. Paying down balances and increasing credits limits is a surefire way of improving the ratio. With a decent payment history, an individual can easily call in to ask for a credit limit increase with a creditor or lender. Most credit companies make money from having their clients maintain high balances. They would, therefore, be more than willing to increase credit limits if asked nicely.
Paying Bills on Time
Apart from making payment to overdue accounts, it is also imperative to ensure that all upcoming bills are well planned for and paid on time. Just a single late payment on bills can significantly injure a credit score. If an individual decides to embark on the process of fixing his credit score, one thing that is of utmost importance is ensuring that all his bills are paid on time. Credit card providers or mortgage lenders are more likely to immediately report a defaulted payment to credit bureaus than utility providers. Things get tough sometimes. It is, therefore, wise to choose which bills to prioritize considering their tendency to report to the credit bureaus.
Opening another Credit Account
To improve credit availability and utilization ratio, an individual can consider opening another credit account. The only catch here is to ensure that however tempting it may seem, no balance whatsoever is carried on this new account. The card’s credit limit immediately increases on available credit. Having a sizeable credit margin and less utilization of the available credit impacts a borrower’s credit score positively. The best way to achieve this is to apply for a card with a bank with a pre-existing account. Another trick is to look for a credit card that does not charge an annual fee. This is because it is likely that the card will remain dormant over time. However, it is worth noting that cards with no annual fee tend to charge a higher interest rate on balances.
Maintaining ‘Old’ Credit Cards
Credit history has a significant impact on the credit score. If an individual has had a credit card for say over ten years and decides to close it, they immediately interfere with their average credit history, which then negatively impacts their credit score significantly. It would be prudent to close on ‘newer’ credit cards as they have not accrued as much credit history as the older ones. Decreased credit history impacts an individual’s credit score in the short-term.
Tips on Maintaining a Healthy Credit
While fixing a bad credit score is crucial, maintaining a stable credit status is much more critical. A healthy credit score opens up an individual to a myriad of opportunities like loans and credit approvals with lower interest rates.
- Paying bills on time- late bill payment will always hurt credit scores. It is essential to budget for timely bill payments.
- Keeping old accounts active- this should ensure that all credit history is used advantageously.
- Autopayments- setting up auto payments via banks is a sure way to ensure that all bills are paid on time.
- Frequent monitoring of credit reports- one of the most important and healthy ways of maintaining a high credit score. By knowing where they stand, a defaulter should make the necessary effort to fix their credit score.
- Requesting professional help- if a person desires to ensure that his/her credit score is improved and well maintained, it is paramount to ask for professional help. Competent and sufficient professional services can help qualify for better loans with better terms and significantly impact the success of the individual.
Lastly, it is very risky to open up multiple credit accounts at once. Customers looking to fix their credit score should limit opening several accounts at once for a better chance for higher credit scores.