3 Easy Steps to Rebuilding Your Credit Score
You might have never given a thought to your credit score until someday you needed money or wanted to buy a home and applied for a loan. When people have their mortgage or loan application turned down by lenders, their first reaction is shock. They are unable to comprehend as to why they can’t take out a loan when millions of others are buying homes and cars simply by filling out a few forms. Nine times out of ten, your credit history is to be blamed for the fiasco.
If your lender has told you that the reason for your mortgage or loan application being turned down is your poor credit score, there isn’t much you can do except working on fixing the score. And, unfortunately you can’t fix credit overnight. It takes time and patience, but the good news is you can do it, if you keep at it. So don’t give up and follow these tips:
Examine your credit report to find reasons for poor credit score
You probably already know that you can get free copies of your credit reports once a year under the Fair Credit Reporting Act. You can request your credit files from Equifax, Experian and TransUnion. You can either order and view each copy online, or request that a copy be mailed to you. Getting your report from many different credit rating agencies may be a good strategy because each report can highlight different data impacting your credit rating.
Once you get the reports, try to find out the reasons for your poor credit score. While a credit score of 750 or more is considered excellent, you are in trouble if it’s less than 600.
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
If you missed payments for a previous loan, it can stay on your credit report for seven years. A foreclosure, collection accounts, short sale, bankruptcies, repossessions, and tax liens can show up on your credit report for anywhere between 7 to 10 years.
These are the events that can have long term impact on your credit score, but if you have screwed up ‘credit utilization’, it will have a short-term impact. Credit utilization is the amount of debt you have relative to your credit limit. Ideally, you should keep it below 30% (10% is even better). You can pretty quickly undo any small drop you may have noticed in your score by paying off those balances and getting your percentage back under 30%.
You should make sure that the credit rating agencies have not made any factual errors on your credit report. Believe it or not, it happens all the time. If you come across one, you should immediately file a dispute with these agencies for a correction.
Pay your bills and installments on time
Now that you know the reason for your poor credit score, you can start building the score by paying your bills for utilities, rent on time etc. If you have missed monthly payments for a loan, make sure that you get current and stay current. The longer you pay your bills on time after being late, the more your scores should increase.
Small actions can have a major impact
Once you start paying your bills on time, wait for a few months and then try to upgrade to an unsecured card like a department store card. Make sure to pay your balance in full on time every month.
If you have had a card for years, don’t close it even if you don’t use it. It will have an adverse impact on the length of your credit history.
People try to close credit cards in order to improve their score, but instead you should try to lower the amount you owe as a percentage of your total amount of credit. You should also not open a lot of credit cards in order to increase your credit limit.
You should never try to make inquiries for many lines of credit in a short period of time. It will have a negative impact on the score. Instead, apply for a single loan within a focused period of time. For example, if you are applying for a mortgage, don’t apply for a car loan at the same time.
Conclusion
Poor credit score is a problem, where precaution is better than cure. For example, it is always better to avoid foreclosure instead of trying to rebuild your credit score for seven long years after it has happened.