How to Repair Your Credit Score

Is your credit down on the mat for the count?  Having a good credit score is a very important component to personal finance.  Having a low credit score can cost you thousands of extra dollars in loan repayments for things such as:

• car loans
• home loans
• other personal loans

Read on to learn about these top 5 tips to repair your credit score:

Understand How Your Credit Score is Calculated

The first step to improving your credit score is to understand how your credit score is calculated.  There are a couple of main factors that you need to be aware of:

1. 35% – Payment history:  This is if you are paying your minimum payments on time each month.
2. 30% – Credit Utilization: This is how much of your total credit you are using.  For example, if you have 4 credit cards with a $5,000 limit on each one, then your total available credit is $20,000.  If you have $15,000 in credit card bills, then your credit utilization is 75% ($15,000 / $20,000).  A lower percentage is better here as it means you have a larger cushion.
3. 15% – Length of Credit History: This is how long you have had each credit account (loan, credit card, etc.).
4. 10% – New Credit: Your credit score can be penalized here if you have opened too many new credit accounts.  The thinking is that if someone is opening a bunch of new accounts, they may have financial problems that will shortly surface.
5. 10% – Credit Mix: You are penalized if you only have one type of credit (such as credit cards).  Data show that consumers with multiple forms of credit (credit cards, loans, etc.) are more likely to pay their bills in-full and on-time.

So How do I Repair My Credit Score?

If you understand each of the above, you can work in each category to begin to repair your credit score over time.  You really have two options here:

1. try to repair your credit on your own
2. find credit repair services that can assist you

Rebuilding your credit is pretty straightforward, but it can be a lengthy process.  For those that are impatient or are not interested in getting into the details, it is usually better to just pay for a credit rebuild service and move on.

If you are interested in fixing your credit yourself, then read on.  Let’s focus on each category and throw you a couple of tips to employ to repair your credit score:

Payment History:

The easiest way to repair your credit score in this category is to find a way to pay at least the minimum of every bill.  If you do not do this, you may pay one balance down faster, but your credit score will be annihilated.

Credit Tip: Be sure you are paying at least the minimum payment for each and every bill.

Credit Utilization:

The easiest way to repair your credit score in this category is to keep any lines of credit open.  This means don’t cancel any credit cards once they are paid off.  Keep the account open and charge something small to it every once in a while.  This will help you to keep your credit utilization low which will help repair your credit score.

Credit Tip: Don’t close out paid off credit card accounts.

Credit History:

This tip goes along with the one you just read.  If you can have a couple credit cards that you have had for 10+ years, then you need to hold onto them.  Your score improves with time as you keep accounts open in good standing.

Credit Tip: Keep your credit card accounts open even if you are not using them.

New Credit:

This one is pretty self-explanatory if you are trying to repair your credit.  You should hesitate from opening new credit accounts or taking out new loans if your credit score is in trouble and you can avoid asking for more money.  It is much better to repair your credit score first, then take out more money if necessary.

Credit Tip: Avoid opening new credit accounts if you can.

Credit Mix:

Over time, you need to develop a healthy mix of credit.  This includes loans, credit cards, etc.  This is kind of like the icing on the cake when you get everything else fixed with you credit.  Once your credit score is in a decent place, it can be a good idea to take out loans you may not necessarily need (such as an auto loan for a used car) just to help build up your credit score and credit history.

Credit Tip: Work on your credit mix once you have repaired your credit score in other areas.

How to Repair Your Credit Score – Final Thoughts

It can be easy to get yourself into credit score trouble.  If you find that your credit score is not where you’d like it, there are steps you can take to repair your credit score.  The 5 tips above are a great way to begin building your credit score back up if it has taken a hit.

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How to Improve Your Credit Score

As people start out on their working lives they need to establish themselves financially.  One important aspect of this is establishing that you are worthy of credit for any number of different purposes – a home or car purchase, or even a small business loan. However, it has become more difficult recently to obtain credit.

The worldwide recession was a result of subprime mortgage lending. Doubtful mortgage approvals were the order of the day as the value of real estate continued to rise without pause. Where was the risk? The Collateralized Debt Obligation crisis showed exactly where the risk was held and it left the real estate sector in turmoil; foreclosures and negative equity were the result!  Everyone still aspires to own rather than rent a home, but the criteria for getting a mortgage approval have become stricter. What this means it that everyone that wants to make a home mortgage application must look at their credit scores.  It is very important that one do all they can to improve their score where there are obvious deficiencies.  Now could be a good time to borrow as interest rates remain low.  So, how does one go about obtaining loan approval?

The Inner Workings of Credit

It is unlikely that most people will ever seek a bigger loan than the one for their home.  So, individuals must make sure they understand mortgages and how to get the one that best suits their circumstances.  First of all, they need to know how credit works; in every case they need to ensure that they will be regarded as a good risk. That involves their borrowing history identifying previous realistic loans and demonstrating their reliability in repaying those previous loans.

Bureaus

This is information that prospective lenders can obtain from credit bureaus when considering a loan application. Credit Bureaus have a statutory obligation to provide a free report annually and everyone should take advantage of that. Some credit card companies have also begun including your credit score on your monthly bill.  It is important that if there are any inaccuracies they are reported and amended. It could be the difference between an approval and a rejection of a requested loan. Indeed, these reports, which are used to provide a credit score, may also influence decisions on job applications and even insurance!

Improving a Score

First of all, it is possible to improve your credit score.  Your credit score is the reference that lenders will use often rather than read through your complete report. The layman is unlikely to be able to understand the calculations that produce the actual credit score, but there are themes that should be understood when working to improve your score.

Ironically, young people that perhaps are going for their first loan, may find that they have little to no credit history.  Little to no credit history means a low or possibly no credit score!  It is almost ‘guilty until proven innocent.’

The good news?  A credit score can be improved, but it takes time. Anyone that is considering trying to improve their credit score should ask if their credit card company reports to credit bureaus (almost all will of course).  One good initial move is to get a secured credit card and ensure that the regular monthly payments are made to clear that month’s purchases. They are easy to obtain because they involve depositing money as surety against default. It may help to stay well below the limit just to give the added impression of financial responsibility.

If an application goes in with a co signatory that already has a good score the applicant will benefit from that score. This can also help to improve your credit score over time.  Similarly, if someone without a credit score can be added to a parent’s card that will start to build a score. This is the method I used while still in high school to help build my credit history and credit score.  Every little bit helps – even a purchase of furniture on a small monthly payment plan or a gas station card. Every time payments come in on time the credit score will improve. A small loan with regular monthly payments that runs properly certainly helps.

How to Improve Your Credit Score – Final Thoughts

There is no doubt that a good credit score makes life a whole lot easier. A little careful thought and discipline should ensure that your credit score will always be good enough to get a loan approved, anything from something small right up to a mortgage to be taken over several years.

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For more saving money, making money, and investment ideas go to www.MoneyAhoy.com