For most, a credit score is background noise in a busy life of more pleasant pursuits. Then we want to acquire something important and expensive — a house, a car, an engagement ring, even a debt-consolidation loan — and that credit score becomes the main theme.
If this is you, and your score is low — say in the mid-500s — chances are you’ll end up with a painfully pricy home/car/engagement ring deal, or no deal at all.
However, being an instant-gratification kind of consumer, you want to know how to fix your credit score, and fix it fast. After all, the panel on the talking heads financial show agreed interest rates this low can’t last forever; you don’t want to miss the opportunity of a lifetime.
We have news, and that news that is pretty much the opposite of good news. You can repair your credit. You can even do it yourself. But you’ll need time, patience and discipline to get the sort of boost that makes lenders salivate over your creditworthiness.
There are a handful of low-hanging tweaks that, if successful, could slightly improve your score and you absolutely should harvest them. Extra points are, after all, extra points; they also can pay off as momentum builders and — better still — confidence.
Review Your Credit Report
Begin by investigating your credit report for negative information and have it removed. Yes, such things are entirely possible.
- Request your full, free credit report. You are owed one per year from each of the big three credit-reporting agencies: Experian, TransUnion, Equifax. One in five credit reports contain errors and/or omissions that can significantly drop your score. Vigorously dispute every discrepancy; provide copies of documents that support your claims.
- For accounts in collections, explore “pay to delete,” a method of removing negative information by negotiating a settlement with the agency holding your bad debt. Get the agreement in writing before you send money.
- Send “goodwill” letters to creditors with whom you’re having difficulties. Typically, goodwill letters are short, simple, pleasant, and direct requests to lenders asking them to remove negative entries. Creditors are not obligated to oblige, but you may strike pay dirt, especially if you’ve had only a few blemishes with the company in an otherwise punctual history.
Sign up for Experian Boost
If your low score is primarily the result of being new to the credit-seeking game and you are timely with your payments for utilities and your cell phone, ask the lender to pull a report from Experian, using its “Experian Boost” plan. Launched last spring, this hybrid model draws on what the industry calls “alternative credit data” — non-traditional payments that provide lenders useful insight into an applicant’s creditworthiness.
The way forward gets a little steeper from here, so it’s a good idea to know what you’re up against.
How FICO Calculates Credit Scores
FICO (Fair Isaac Corporation) and the big three credit-reporting agencies employ proprietary formulas to arrive at an individual consumer’s score. While weighed according to their own secret recipes, however, each includes the following ingredients:
- Payment history accounts for about 35%, making it the most important variable. It’s why late payments and/or partial payments carry a significant sting.
- Credit utilization ratio — the amount of your available credit you’ve used — counts for 30% of your score. Credit bureaus consider how much of your overall credit you’ve tapped, as well as your utilization ratios on individual credit cards.
- At about 15%, length of credit history — the average age of all your open accounts — indicates whether you are a proven long-term risk. You can’t do much to hurry time aside from one trick we’ll share later.
- Credit mix, revealing whether you are someone who can manage a variety of borrowing situations (credit cards, personal loans, car loan, mortgage), accounts for 10%.
- New credit applications come in at 10%. Don’t apply for any new credit and you win this category.
Game the FICO System
Of the six categories influencing your credit score, there’s really only one you can influence significantly short-term: your credit utilization ratio.
This is not to suggest you shouldn’t make sure all of your accounts get current and stay that way; it’s just difficult, as noted above, to undo late-payment history.
Pro tip: Make sure payments arrive before the statement closing date. That way, lower balances get reported to the FICO and the big three.
Most other factors being equal, consumers with scores in the upper 600s — the bottom of the “good” range — have credit utilization ratios between 40-50%. To get into the 700s, your utilization must sink below 30%. If you’re in a hurry to help your score, use under 15%. The less you use, the better.
Fixing this is a cinch … if you have a fat savings account or maybe a wealthy (and generous) uncle. Otherwise, you need to find extra money in your budget (or extra income in your month), combined with spending discipline, to whittle down those balances.
Another way to attack high balances is with a debt-consolidation loan — if you can swing it. Present your plan to a bank or credit union, or go online to any of the assorted peer-to-peer lenders and you may be able to zero out your credit-card balances at the same time you secure a lower interest rate than you were paying Visa.
We’ve read here and there another way to lower your credit utilization ratio is to seek a boost in your balance limits from your current lenders. The mathematics of this gambit are undeniable, but the idea of seeking higher balances when we’re having trouble managing the balances we have makes our stomaches ache.
Our final quick-boost tip: If you have a mystifyingly benevolent parent with impeccable credit, ask to be added to his/her account as an authorized user. This will not only help your credit utilization (ideally the added account doesn’t have a high balance) but it should also lengthen your credit history. Remember, this card is strictly for a credit boost, so do not under any circumstances, use the card when it arrives in the mail.
If this strikes you as a significant amount of heavy lifting with limited guarantees of a swift improvement, consider getting coached up by a professional from a nonprofit credit counseling agency. What you’re wanting to do by getting advice from the internet they do every day, with practiced expertise and the support of staff.
Your counselor will be able to provide advice and guidance, not to mention an invaluable piece of the puzzle: the discipline of an outside influence keeping you honest.
You may discover what you really need is not a quick fix for your ailing credit score but, instead, a whole new way of looking at your financial life. Your counselor can talk to you about a debt management plan that will get you into a fresh start in as little as 36 months.
Wait. What about that these-low-rates-can’t-last/chance-of-a-lifetime chatter on the financial channels? Patience. The experts have been saying the same thing since 2010.
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