“Credit” is a Latin word meaning trust. As long as you maintain that trust, you will be bestowed with more trust. In present day Finance, that trust comes in the form of larger credit limits, and cheaper interest rates.
But what happens when you break that trust? What happens if you do not pay, even the minimum amount, when you are required to pay?
Credit Reporting Agencies punish you by lowering your score so that future lenders think twice before offering you credit, and present lenders re-assess and raise your interest rates on current borrowings.
Before you know it, you can’t finance or lease a new car, you can’t get a mortgage, you can’t even get something as simple as a phone connection.
You could have bad credit for the following reasons:
- Late payment of Credit Card Bills
- Late payment of bills
- Defaulting on a loan
Whatever the reasons, bad credit is not permanent, and can be reversed by following a few tips and tricks we will outline for you.
What is the Credit Score?
Before we delve into how to improve your credit score, you have to understand what the credit score is.
The credit score is based on a set of calculations created by FICO.
The standard credit score ranges for 300 -850. The lower this score, the worse your credit is.
Here is a general break-down of the credit scores and their meaning for you:
A lower Credit Score also results in:
- Higher Interest Rates for your payments
- Refusal of new credit
- In some instances, a refusal of a job
What you need to know is that the score is based on a set of factors that are weighted as follows:
You must understand the components in detail.
Payment History: looks at how good you have been with your payments. These can include:
- Late payments,
- Bankruptcy declaration
- Length of time since last payments
Amount Owing: calculates how much money you owe in how many different accounts.
Credit History Length: assesses how long it has been since you have started using credit.
New Credit: searches for recent tries and occurrences of new credit being established. These can include:
- New credit accounts opened recently
- Number of inquiries about credit score
- Time since new account opening or credit score inquiry
Types of Credit Used: takes stock of the different types of credit products you have like:
- Credit Cards
- Car Loans
- Line of Credit
Let Do It
Now that you understand how the credit score is split up and ascertained, you are ready to do something about improving it.
By following the following steps, you can rest assured that your credit score will increase over time:
- Know how much you owe completely. Keep an organized record of EVERYTHING that you owe
- Order your credit report from Equifax or TransUnion to determine everything you have on file
- Check your credit report for any mistakes or discrepancies that you are not responsible for
- Start paying off the highest interest debt (usually the credit card) first
- Keep about 30% of the credit limit on your credit card every month
- That means that if you have a $1,000 limit, charge up to $300 on it every month
- Pay off the amount at the start of every billing cycle and have the outstanding amount on your file by the end of the billing cycle
- You want the $300 amount to show up on your credit file as it shows that you are using and paying off your credit card responsibly without maxing out your card
- Do not keep applying for new credit for a while as every rejection you get negatively affects your score
- Keep your oldest credit card active and up to date, as old is gold in terms of credit history
- STOP being late on your payments. This REALLY hurts your credit score
If you follow these steps, your credit score will increase guaranteed. All it takes is some patience and dedication.
Having a horrible credit score is like being stuck between a rock and a hard place. It is like a vicious cycle: You can’t improve your score without borrowing and you can’t borrow without improving your credit score.
That is when you have to draw the line, make a commitment and start small. Slowly but surely, your credit will increase. And when you are finally back to where you started, you will be wiser and more responsible.