Proven Tips to Repair and Build Your Credit Score
Written by Debtfree on March 6, 2018
Your credit score also known as the FICO score shows your financial strength and creditworthiness. And this is exactly why lenders and creditors such as banks and credit card companies use your credit score. They evaluate your financial standing and the potential risk of bad debt, before they approve your request. Based on your credit score and risk, creditors then decide whether or not you qualify for the loan, and if you do then at what interest rate and credit limits.
FICO (Fair Isaac Corp.) is the industry leader in credit scoring. It is used by more than 90 percent of creditors across the US, and ranges from 300 to 850 points. A good or an excellent credit score is above 700 points. Borrowers with more than 700 points get unsecured loans and that too at best credit rates. However, borrowers with credit scores below 600 points usually qualify for unsecured loans with high interest rates and large down payments. Needless to say, it is extremely important that you have a good credit score.
How to Repair and Build Credit?
Repairing bad credit is just like losing extra pounds; there are no short cuts, it takes time, patience and control to see the results. Simply put, to rebuild your credit you need to manage it responsibly over time. Building bad credit is easier said than done unless you have a clear understanding of how to do it. And this is what we are going to focus on in today’s post.
When it comes to building your FICO score, you must have a strong understanding of the factors that influence and affect it. This will help you devise a strategic plan to repair your score over time. To begin with, there are five factors that influence your credit score. These are:
1. Payment History/ Timeliness of Payments
Payment history contributes 35 percent to a FICO score calculation. This means if you don’t make your monthly payments on time or have any past negative records like foreclosures, lawsuits and bankruptcies, your credit score will take a hit because of your payment history. It takes into account how late the payment is made, how much you owe, how many late debt payments you’ve made and how many you’ve missed.
2. Credit Utilization
Credit utilization contributes 30 percent to your credit score calculation. It basically includes information on the amount you owe on all of your accounts. The more debt you have in relation to your credit limit, the lower will be your credit score. Therefore it is extremely important to pay attention to your credit utilization at all times.
3. Length of Credit History
This factor affects your credit score by 15 percent. It is calculated based on the age of your latest credit account, the age of your first credit account and the average age of all your accounts. A good and long credit history is better as potential creditors view you as more creditworthy.
4. Types of Credit Use
It contributes to your score calculation by 10 percent. It is the mix of different types of credit accounts you have such as auto loan, mortgage loan, personal loan and credit cards. In general, this doesn’t have a big impact on your credit score and besides, diversification is always better than one type of credit account.
5. New Credit
New credit contributes to your FICO score calculation by 10 percent. Applying for different types of credit at once can negatively affect your score as each new application for credit results as a new credit penalty.
Now that you know the factors that influence your credit rating, it’s time to learn some tips that can help you build your credit and contribute to your FICO score positively.
Proven Tips to Repair and Build Your Credit Score
Pay Your Bills Timely
Debt payments, even if they are a few days late, can affect your score badly. Therefore, the first thing you need to do to repair your bad credit is to make timely payments not only related to your credit accounts but other accounts too like utility bills, rent, mortgage payment and auto loan, to name a few. By paying off your debts and bills on time you will be able to create a better credit profile easily.
The good news is that poor credit performance can be swept under the rug if a recent good payment pattern shows up on your credit report. Staying current and making regular monthly payments on time makes a great impression on the creditors and your credit score. It shows that you are managing your credit properly.
Keep Credit Card Debt Low
Make sure that your debt balance does not exceed 30 percent of your credit limit, at any point and time. Please note, balances are reported mid billing cycle which means a high outstanding balance shows high credit utilization which can affect your credit score badly and that is something you definitely don’t want! The best way to keep your balance low on your credit cards is to use it minimally. When you go out for shopping prefer to pay with cash rather than through your credit card. Also, avoid impulsive shopping. Don’t shop for things that you like but don’t need.
Avoid Getting New Credit Cards
Many people get new credit cards to increase their available credit limit but this move is no good. In fact, it can actually backfire and lower your credit score dramatically. So, avoid opening credit card accounts that you don’t need. Also opening too many accounts rapidly can also lower your average credit account age.
Apply for New Credit Only When Needed
Diversification is important but opening credit accounts only for a better credit mix is not always good. It will not raise your credit score. Therefore, only apply for new credit when needed.
Check Your Credit Reports Annually
Request for your credit reports from all three credit bureaus Experian, Equifax and TransUnion. These credit bureaus record and store your credit activities in a report format. The data in your credit report is then used to calculate your score which may sometime contain errors. Therefore, it is advisable you request a free copy of your credit reports from all three bureaus to check them for errors. If you find any error make sure you get it fixed, even it is a small error. Remember small errors can also impact your credit score negatively.
Follow and practice these proven credit building tips to improve your FICO score and show creditors that you are creditworthy. Good Luck!