If you’ve tried repeatedly to get a loan or a new credit card only to be turned down, there’s just one reason – you have a low credit score. What, you might ask is a low credit score? Most lenders see your credit score in one of five categories as follows:
• Excellent Credit: 781 – 850
• Good Credit: 661-780
• Fair Credit: 601-660
• Poor Credit: 501-600
• Bad Credit: below 500
If your credit score is below 600 this would explain why you’re having a difficult time getting new credit. Fortunately, there are some things you could do to raise that credit score and fairly quickly.
Get your credit reports
The first, basic step in credit repair is to get your credit reports. Federal law allows you to get your credit report free once a year from each of the three credit bureaus (TransUnion, Experian, and Equifax). Or you could go to the site www.annualcreditreport.com and get all three together.
The reason it’s important to see your credit report is they will have the data that was used to calculate your credit score. Also, your credit reports may contain errors. The Federal Trade Commission released a report two years ago revealing that about 20% of us have errors in our credit reports, some of which are so serious they are damaging our credit scores. When you review your reports look for errors and if you find any be sure to dispute them with the appropriate credit bureau.
Get current on any missed payments and stay current
There are five components to your credit score. The most important is your credit history, which accounts for 35% of your score. This Is because the people behind credit scoring believe that past history is a good indicator of future behavior. As a result, late payments will have a very serious impact on your credit score. If you have missed payments and can catch up on them and stay current your score should increase.
Determine your debt to credit ratio
The second biggest part of your credit score is your debt to credit ratio as it is 30% of your score. The way that it’s calculated is very simple. Just take the total amount of credit available to you and divide it into the amount of credit you’ve used. As an example of this, if you have $20,000 in credit available but have used up $16,000 of it your credit ratio would be 80%, which is way too high. In fact, most experts believe your debt to credit ratio should be no more than 30%. The good news here is that this is something that you can affect fairly quickly by paying down some of your debt. Going back to the example given above if you were able to pay off a $6000 debt your ratio would immediately go to 50%. While that would be ideal it would certainly be much better.
Don’t close old credit cards
Keep old credit cards open even if you no longer use them. This is because length of credit history is 15% of your credit score. Here’s an example of how this works. If you opened your first credit card 10 years ago and a new one just three years ago you would have average length of credit history of 6,5 years. But if you were to close that 10-year-old card your length of credit history would immediately drop to 3.0 years and this would have a negative impact on your credit score. Also, if you haven’t had credit very long don’t open multiple new accounts too fast. This would lower the average age of your accounts and will have a big impact on your credit score — especially if your credit reports do not include a lot of other information.
Don’t open a number of new accounts all at once
Every time you apply for new credit this is called a hard inquiry and will ding your credit score anywhere from 2 to 5 points. Apply for a new line of credit and three credit cards within a month and your credit score could be reduced by as many as 15 to 20 points. That alone could cause you to drop from having a fair credit score to having a poor one.
Automate your payments
The simplest way to make sure you don’t miss any payments is to automate them. If you are not able to do this through your bank you may be able to set up automatic payments with your lenders. As an alternate to this contact your lenders and have your due dates changed so that they all fall within the same week – making it much easier to remember to pay them.
Most important of all
Last but not least the most important thing you can do is pay off your debts. To do this you will need to make a plan and have a strategy. Two of the most popular of these are the snowball strategy and the avalanche strategy. You can find more information on both of them by searching on their names. Pick one, get started and you might be surprised at how quickly your debts will start to melt away.