Life is tough when your credit score stinks. With the national economic mess of the past few years, millions of Americans can attest to that very real fact.
Whether it was a foreclosure, short sale, deed-in-lieu of foreclosure, a job loss or just plain irresponsibility, there are some steps you can take to repair your credit score and get it back into the range where it is, once again, attractive to lenders and credit card companies.
What is considered a good credit score? Credit scores range from 300 (the worst) to 850. Although a score of 700 will get you lower rates and more credit opportunities than lower scores, 760 and above is considered prime.
Where Does My Credit Score Come From?
Several years ago CNN reported the results of a consumer study conducted by Consumer Resource Corp. This study found that 27 percent of Americans don’t realize that their credit scores are used to measure how risky it is to lend them money. Many more don’t understand the whole credit scoring process – how it’s done and why.
If you’ve ever ordered your credit report, you did so from one or all of what are commonly known as “the big three” credit reporting agencies: Experian, TransUnion and Equifax. These agencies compile massive amounts of financial information obtained from companies from which Americans have obtained credit in the past. From this, they determine each person’s payment history, how long he or she has had a credit history, the various types of credit they have and the amount of credit debt held.
While each of the big three credit reporting agencies also offer their own scores, the most well-known and commonly used credit score comes from the Fair Isaac Corporation. It’s known as your FICO® score.
When the big three agencies turn their information over to FICO®, it’s fed into a complicated formula and out pops a three-digit number that pretty much rules your financial life. Thankfully, your FICO® score adjusts according to how risky you appear. The less risky you appear, the higher your score.
The best way to start repairing your credit score is by paying your bills on time, every month. Yes, it sounds simple and it is the responsible thing to do, but it’s also one of the quickest ways to pump your score into a more acceptable range. Let’s look at additional ways to get you on the road to the perfect credit score.
Manage Your Credit Cards
The Raleigh Area Development Authority says that a person with a 707 credit score can raise it 20 points just by paying the bills on time for one month.
Your use of credit cards may be the culprit when your score is at rock bottom. Credit scoring agencies factor your credit card usage several ways.
First, they look at the age of your credit. New credit, such as opening new credit card or department store accounts, makes them leery. Just what will you do with all this new-found credit? Since they don’t know, you become a higher credit risk and take a 10-point ding on your score. High balances make you appear risky as well. If your cards are maxed out, you may lose up to 70 points on your credit score.
Don’t close your credit card accounts, just pay them on time. Consumers with no credit cards or installment loans look risky (it’s that fear of the unknown again) and tend to be penalized with lower scores. Besides, closed accounts still show up on your credit reports and may still affect your score. If you have the money in your budget, another quick way to raise your score is to pay down high credit card balances. Try doubling your payments for a few months or at least pay a payment and a half.
Another technique to help increase your credit score is to ask your credit card company to re-age your account. Although you still owe the balance due and late fees, re-aging brings the account status to current, according to the Consumer Credit Counseling Service of Greater Atlanta.
A credit card company is more apt to re-age an older account that is nearing the statute of limitations for collection. In exchange for removing late pays or collection activity, the statute of limitations “clock” is set back, assuring the lender of either being repaid or being able to pursue legal remedies. In exchange, you get an instant boost to your credit score.
Ask the credit card company to increase your limit. If you’re delinquent or have a number of late pays this may be futile, but it never hurts to ask. The offer of another payment or two may act as an incentive. Remember: don’t use the increased credit if granted. Keep paying down that balance.
Many Americans didn’t do anything to deserve a low score other than to have never used credit. To credit scoring agencies, these people are, again, unknown quantities. How they will use credit when they receive it is a mystery and therefore makes them a credit risk in the eyes of the agencies.
Unlike the folks who need to slow down on their credit card usage, you need to obtain a card, use it and pay the balance on time. Mortgage experts Steve and Eleanor Thorne suggest applying for a secured credit card. They claim that since credit unions typically don’t report to the big three credit reporting agencies, you should apply with a bank instead. The idea is to obtain a card from an institution that will report your responsible use of credit.
Secured credit cards get their name by being secured by a savings account. The applicant deposits a specific amount of money (this can be as low as $100 in some cases) and purchases are drawn against that money. There may be a an annual fee, a monthly charge, a one-time charge or a per-transaction charge, so compare cards carefully before applying.
One final word before you get to the handy credit score checklist below: The Thornes warn that you should seek professional advice if your credit score is in the 500s. Paying off debt randomly may do more harm than good, and a reputable credit repair counselor or mortgage person can steer you in the right direction.
Checklist for Repairing Your Credit Score
- Order your credit reports from each of the big three agencies to determine where you stand.
- Dispute any errors you find on your credit report. Some shady credit counseling companies may suggest you dispute everything on the reports, which may do way more harm than good. The Federal Trade Commission offers advice on how to file disputes on its website.
- Pay all your bills on time, every month.
- Pay down your credit card balances. If you can only afford to pay one at a time, pay department store cards first if you have them. Otherwise, pay off the one with the highest balance first. Aim to get the balances within 30 percent of your credit limit.
- Use old credit cards that you haven’t used lately to keep their histories active. Remember, old credit is worth more than new credit when it comes to your score.
- Obtain a secured credit card if you have no credit history. Use the card for small purchases and pay the balance on or before the due date.
- Ask creditors to re-age your accounts. This might be challenging, but if even one creditor agrees to do so, your score may improve dramatically.
- Ask the credit card companies to increase your credit limit.