Menu

Improve Your Credit Score

These days, your life is very much dependent on your ability to maintain good credit. Approval for installment loans, credit cards, mortgages, auto loans, and even rental housing, are based on your credit score and your demonstrated ability to pay off debt. With that in mind, understanding your credit score and how it affects you is essential to chart a successful path through life.

So, what do you do when life throws you a few bumps, and your credit takes a blow? Is there a way to rebuild your credit after setbacks? How does a weak credit score affect your appearance to lenders?

Well, with a little patience and planning, you can rebuild your credit. In this article, we’ll give you tips about how to do it. These suggestions take time to develop, however, so you shouldn’t expect a dramatic change overnight. In fact, you should always be suspicious of anyone offering you quick fixes for your credit report.

Step-by-Step Guide to Improve Your Credit Score

Discovering that you have a low credit score doesn’t mean you have to give up and accept it. There are steps you can take to improve your rating and get back to a firm financial position.

1. Bring your debt down.

Racking up a lot of debt is one of the biggest hindrances to any good credit maintenance plan. Carrying a high balance – regardless of the circumstances that initially made that debt necessary – shows creditors a lack of fiscal discipline. It creates uncertainty about your willingness to make the proper sacrifices required to limit their exposure to risk.

Every debt has a maximum available balance and an existing open balance showing how much of the total balance you’ve used. Ideally, your open balance should be no higher than 30% of your total available balance for any single line of credit. Work to bring your total debt down across all open credit lines.

2. Consolidate Balances

One of the biggest problems that consumers have with debt is maintaining too many open balances across several accounts. It becomes unsustainable to balance all of those obligations adequately in any coherent and strategic way. Consider each line of credit as a mark against your total score.

Consolidate your loans and credit cards as much as possible. Pay off credit lines with credit cards if you have to. Concentrating your debt pays off most of your open accounts and puts them under a single payment plan, rather than forcing you to keep track of several schedules.

3. Dispute Credit Card Issues in Writing

Credit reports often have mistakes, including open accounts with zero balances that should get cleared. Credit-card companies regularly fail to report when you have successfully paid off a line of credit. Your credit report also might include erroneous accounts that don’t belong to you but drag down your credit score.

It may take some time to work through your credit report and find such disputable items. But as soon as you see them, send a letter to the creditor asking to have them cleared from your credit. Paying off accounts and disputing false charges is the quickest method to better credit. Some companies even offer dispute services to help you investigate and report these charges for a fee.

4. Diversify Credit Cards

Having multiple credit cards may sound counterintuitive, given that we’ve also said you should consolidate. But it’s another method you can use to improve your now combined credit. It also helps you build better habits and discipline for the future.

Use one card for the majority of your credit purchases. Ordinarily, this will be your card with either the most substantial available balance or the best interest rate. Then, if you can, open two other credit cards. Keep the lower balance cards open but maintain them consistently at a zero balance whenever feasible.

5. Take Out a ‘Bad Credit’ Installment Loan

Taking out a small loan to help consolidate other debt is a great way to rein in several open accounts and build good credit. Installment loans designed for bad credit often are shorter-term loans with smaller, more manageable balances.

Smaller installment loans – including credit cards – give you a set amount of available funds, which you can use to help consolidate other debts. When you pay these loans off over time, it proves to other creditors that you’re capable of fulfilling your financial commitments.

6. Make Timely Payments and Pay Down Balances

It should be evident that the best antidote to a bad credit rating is to start building a good one. Fulfilling your obligations on time and gradually paying off open balances is the best way to establish your willingness to work within a credit agreement. Paying on a regular schedule demonstrates your ability to budget and shows your understanding of how credit works.

In some cases, paying on time and consistently might be one of the few options available if your credit rating has already nosedived. If you’ve been turned down for bad-credit installment loans or can’t combine credit-card debt, try to be patient and diligent with the balances you have.

7. Minimize Loan Inquiries

Every time you apply for a new loan, your lender will make a credit inquiry. Most of the time, these are ‘soft’ inquiries, meaning they won’t adversely affect your credit rating. But once you accept the terms and make a formal application, it becomes a ‘hard’ query, which can hit your credit score.

With this in mind, try not to apply for too many credit opportunities. If you get rejected for one loan, allow time before you try for a new one. Allow time to repair some of the damage proffered by failed hard credit checks.

8. Be Patient

Once you’re on the path to better credit, be patient with the process. It can take two years from embarking on a plan to rehabilitate low credit scores. During that time, don’t apply for new credit or ask for repeated credit reports. Show lenders that you can be trusted and diligent to improve your position.

How Can I Check My Credit Score?

By now, you might be getting curious about how to review your credit report. Luckily, there are several ways to see it. If you do a simple search, you’ll find dozens of different websites that offer free credit checks.

Some services request a fee to provide you with your credit report. But because several others offer it for free, be wary of paying for your report – particularly considering that the law entitles you to a free credit report each year.

If you decide to get a copy of your annual credit report – the most complete and detailed of the available internet offers – you can get it through annualcreditreport.com. Annualcreditreport.com pulls its information from all three major credit-reporting agencies – Transunion, Equifax, and Experian. As such, it’s the most reliable and thorough report available online. It will not give you your FICO score (summary score based on your fiscal behavior), but it does have all of the pertinent information used to create your FICO score.

If you look online for information about free credit reports, you’ll find that many people are anxious about it. They’re concerned that requesting a credit report will adversely affect their credit. But this simply is not true.

Receiving a copy of your credit report through any of these offers doesn’t adversely affect your credit rating in any way. It’s the same information that lenders use when considering an application. But it’s regarded as a ‘soft’ request, which won’t affect your credit, so don’t worry.

Soft, Hard, and Alternative Credit Checks

Soft Checks

There are several types of credit checks that installment-loan providers and credit-card companies use when determining the fiscal viability of customers and potential customers. The kind they perform often determines whether it affects your credit score or not. In fact, some of them are little more than a verification of income.

The first, and most prevalent, is called a soft credit check. Soft checks happen when lenders, credit-card companies, or other businesses pre-approve you for deals and promotions. They also occur when you permit businesses to review your credit for security verification, such as when you’re applying for an apartment rental or an employment contract.

When you request your own credit report, it is a soft credit check. Because soft checks don’t report to the credit bureaus, they don’t become part of your official credit record, and therefore don’t get calculated into your credit score. They’re a terrific method for you to keep track of your credit and find irregularities and inaccuracies.

Hard Checks

Once you agree to the terms of a pre-approved loan, lenders request a hard check from all three reporting agencies. Transunion, Equifax, and Experian log these hard check requests as a means of maintaining a record of your pursuit of loans and credit.

Hard credit checks become part of your official credit record and can adversely affect your credit score. Lenders, financial institutions, and credit-card issuers use hard ‘pulls’ when they’re making their final decisions about loan applications and calculating the risk of lending. Hard checks can drop your credit score a few points every time someone pulls one.

Try to limit the number of hard checks on your record. Accept only the offers that help you with your current financial situation, such as consolidation loans or applying for an additional credit card that you intend to leave at a zero balance. Leave time for your credit score to improve, or ‘heal,’ between applications or you’ll risk driving down your overall credit score.

Alternative Checks

In the past, credit scores and checks were almost entirely dependent upon reported debt, including loans, credit cards, mortgages, car payments, and the like. Lenders reported this debt to the credit agencies, along with your payment history and remaining balance. They aggregate and average them to identify a single numerical value.

These days, you can find companies offering small term, low-balance installment loans using alternative credit checks. These credit checks look at monthly income as well as other regular payment debts, such as utilities, which usually do not get reported to the major credit agencies.

The short-term, ‘bad debt’ loans often check little more than your monthly income. To be eligible, you should make at least $800 per month gross. But rates and terms are better when you make at least $2,000 per month in gross income.

If you’re considering borrowing from a lender using alternative checks, make sure you carefully read the terms and conditions. Alternative checks sometimes trigger fees or even hard credit checks after you’ve been pre-approved. On their own, however, alternative checks do not get reported to credit agencies, so they do not affect your credit score.

How Does My Credit Score Affect the Loan Offers I Get?

You’ve undoubtedly heard that your credit score affects the quality of your loan eligibility. Perhaps you’ve experienced its effect yourself at some point. But how does it work in practice?

Every lender, when approached by a potential customer, will do a credit check to determine the borrower’s historical capacity for paying back loans. Much of the time, those initial credit checks are ‘soft’ checks, which don’t adversely affect your credit score. A soft pull often is used for pre-approval and gives you an idea of the term and interest rate for which you will qualify, based on your income and public credit history.

Lenders review your credit score every time you apply for credit or an installment loan. The higher your score, the better your chances of getting approved. A high credit score means you’re more likely to qualify for a higher available balance, lower interest rate, and a more extended payback term.

A lower score makes loans more problematic and increases the likelihood that you will pay higher interest rates and receive lower credit balances. If your score is too low, it may even result in you being considered ineligible for certain loans.

Writer

Vivaan Marsh is a professional writer, editor and an expert in personal finance. Her career as a professional writer stretch for over 11 years. One of her passions in life is to help everyday families with there financial problems, making their life a bit easier and explaining complicated topics in an easy way. Read more >

Write a comment

All fields are required

Comment

Main menu