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In the first part of the article series, we understood how FICO score is calculated. We also saw the course of action to rectify an error. Now, we will discuss ways in which we can improve your credit score. Ways which will turn your bad credit into pristine credit.
Improve Your Score with These Tips
It's not your destiny to suffer from high interest rates for the rest of your life. Your score is only a snap shot of your present economic strength. You can always work on it and improve.
PAYMENT REMINDERS
Juggling work and family is a tiring process. It is very difficult to keep up with all the payments. So, set reminders via e-mail or SMS. Several banks provide payment reminders also. You can make use of them. Another way is to pay automatically through your bank account. This will save your time and make sure that your payment is never delayed.
PAY BILLS ON TIME
Late payment is considered a sin in the process of improving your credit score. But, it is really hard to keep up with them. So, here's a tip for you.
Preferential Payment
I perfectly understand that making all the payments is very difficult in this economy. So, you can go for Preferential Payment.
Pay for only those bills which are reported to the credit bureau. There are few bills which can be paid later. You will obviously be penalized for late payment but it will have less impact on your credit report.
Such bills include:
>> Utility bills like Cable, electricity, water, cell phone
>> Medical Bills
>> Payday loans
This tip is useful when you are totally tied up and cannot pay. This doesn't mean you should stop paying the bills. If you do so, there are chances of the collection agency getting involved. This is bad for your credit report.
INADEQUATE CREDIT FILE/HISTORY
Having an inadequate credit history will definitely have a negative impact on your credit score. If you have a good credit history, anyone will offer you a loan. But if you don't have any history, how will the lender determine your credit worthiness?
So, if you have any creditors who do not report your credit history to the bureau, ask them to do so every month.
This will gradually help you develop a credit history.
KEEP YOUR ACCOUNTS "CURRENT"
Keeping up with payments is almost impossible today. So what you can do is call your creditors and ask them to keep your accounts "current". Negotiate lower monthly payments and make sure you pay it regularly.
*PAYING OFF THE ENTIRE DEBT
Sorry to say so, but paying off the entire debt won't improve your credit score IMMEDIATELY. You may think of getting a consolidated loan and paying off all the negative items on your report. But don't make such a mistake. It is because no matter what you do, any late payment will stay for as long as 7 years. It is better to concentrate on making payments of loans and accounts with higher interest rates.
I do not mean to say that paying off loans is not a good idea. You need to understand that a proper debt management plan is required to get you out of bad credit. You just cannot pay haphazardly because it won't do much good to you.
Are You NEW On The Credit Scene? Don't Open Too Many New Accounts
Your credit score is affected by the average age of your accounts. If you don't have a long credit history, opening several accounts in quick succession will reduce the average age of your accounts. Also, it will show you as a risky individual and you will see a reduction in your score.
COLLECTION ACCOUNTS
You should know that paying off a collection account will not remove it from your credit report. You can negotiate a settlement amount and pay it. But, make sure you ask the collection agency to remove all the critical remarks from your report.
Also, it is a rumor that paying off the entire amount will drastically improve your credit score. It is because the "date last active" will change on the collection accounts. A recently active collection will have a negative impact on the credit score.
So, my advice is that you can pay off the collection account. But don't apply for any loan in the next few months. Your credit score will be negatively affected by it for a short term, but paying off the amount will definitely have its advantages in long term.
CREDIT CARD
Never Max- Out
Your FICO score also considers the Credit Utilization Rate. It is the ratio of all your credit card balances to the credit limits. It is good if you can maintain it at 30 %. It is fantastic if you pull it down to 10%. Never max out your credit card. Make sure that the accurate credit card limits are reported to credit bureaus.
If the ratio of credit utilized to credit limit increases, your scores will reduce. This is under the assumption that using more credit means you are in need of money and so a high-risk customer.
You should also never consider the option of using the entire credit limit and then paying the full amount every month. I'll explain you why.
Remember the discussion in previous article? There is a difference between the time you make payments and time the creditor reports it.
So, even if you pay the entire amount, there is a huge possibility that the bureau will have old data. This means it will show that you have used up your credit limit and have not paid the balance.
With high interest on credit cards, it is very difficult to maintain them. So when you close them, make sure you follow the tips.
Don't Close A Credit Card With Balance
If you do so, your available limit and the credit card limit will be shown as $0. It is assumed that you have maxed out your credit and hence, there is no difference between the two. This will have a very bad impact on your score.
Don't Close Your One And Only Credit Card
If you close your credit card, you will lose an important component of the credit mix. You must remember that 10 % of your score depends on the credit mix. So, why close your ONLY card and hamper your credit mix.
Don't Close Your Oldest Credit Card Account
You also need to remember that any history will remain for only 7 years on your report. Suppose you have decided to close your oldest credit card which was issued in 2000.
The details of this card will be shown for 7 years from now and after that it will be written off from the report. This means that your current credit history goes back to 2000. If you close this card, the credit history will date back to a more recent year. This will reduce the depth of your credit history.
Lenders have a tendency to view borrowers with short credit histories as riskier than borrowers with longer histories. So, never close your oldest credit card.
If it is necessary to close a credit card, always go for the newest one.
Don't Unnecessarily Apply For A New Credit Card
Also it is a myth that you can raise your score quickly by applying for a new credit card. If you apply for one, you can surely improve your Credit Utilization Ratio. But on the other hand, it will have a negative impact on the length of your credit history and the average age of your accounts.
So, my best advice is to apply when necessary.
Have Patience As There Is No Stopgap Solution to Bad Credit Score
If you manage your finances properly, nothing can stop you from improving your credit score. These tips will help you rebuild your score. But don't expect any magic. You will have to be patient and realize that it takes months to rebuild credit scores.
So, when you start to work on it, don't apply for any loans. This is important because any pay off always has an impact on your score, mostly negative.
We started with the general understanding of FICO score. We also discussed the steps to remove errors from your credit report in the first article. With the second one, we comprehended several factors that have an incredible impact on the score.
If you follow these tips, your credit score will definitely improve. Once you have a stellar credit score, availing loans will become very easy.
Wish you a great credit score ahead!!!
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