What is a credit score?
Your credit score is a computer's best guess at how likely you are to repay your debts. If you have a lower score, you are considered to be a higher risk by banks and lenders. Your credit report is constantly updated to reflect your credit history. Any time you take out a loan, make a payment, are put in collections, sued, file bankruptcy, etc. the three credit bureaus will be notified and instructed to put that information on your credit report. Once it is on your report, no matter if the information is good or bad, it will stay there for seven to ten years...THAT'S RIGHT...7 TO 10 YEARS! (That is, unless you have it removed.)
How bad credit affects your credit score
Any amount of bad credit history makes your score fall tremendously. A few late payments, judgments, liens, charge offs, foreclosure, repossessions or collection listings will make your score drop like a lead balloon. It also doesn't matter if you pay off those accounts. You score will still be affected. If you want to do improve that score, you will have to get rid of those listings.
Improving your credit score
If you want to raise your credit score, you must improve your credit report. The reality is, you need to start NOW! Improving your credit score takes time. Don't procrastinate!
There are two ways to improve your credit score. The first and best way is to hire a professional. For only a little more than a weeks worth of gourmet coffee and lunch at your favorite fast food restaurant, you can hire a credit improvement specialist to polish up your credit score. It is easy and effective and well worth it.
The second way is to do it yourself. If you are willing to spend the time and energy to do it, and are tenacious about follow up calls and letters, it can be done - but make no mistake, it will take you a good bit of time and lots of letters and phone time.
Step one: Get your credit reports!
Step two: Analyze your reports! The federal law allows you to dispute any item on your credit report that you feel is wrong or unprovable. This forces the credit bureaus to prove what they have noted to your report (which is not easy to do on a consistent basis).
Step three: Make a calendar! You will want to track everything that you do - dates you ordered your reports, when you sent the disputes, made calls, received stalls, received answers. Make sure you write it all down! You will need it.
Step four: Write dispute letters! Lots of them! Note whether the dispute is “not yours” or “not late”. You will also need to tell the bureau what outcome you are looking for (i.e. delete it, or erase the latest notes), and provide a reason for the dispute. It is important not to dispute every negative listing on your report at the same time.
Step five: Do it all again, and again, and again and again…..Watch the calendar and send follow up letters if it takes more than 5 weeks to answer your disputes. If they verify some or all of the items you disputed, wait 60 days and dispute them again more forcefully. Stay on top of it! If you don't monitor and follow up every week or two, you will not get the most desired results. Remember, if you tire of doing this yourself, you can always hire a professional company to do it for you.
Unpaid delinquent accounts
These are defined as judgments, liens, charge offs, repos and foreclosures. These accounts are tricky. If you pay them off, it might lower your score. If you don't, it is hard to get them deleted or they might reappear. Solution? Pay or settle on the condition that they delete it from your credit report (not just show it paid). Get this in writing before you pay. If they say that is not possible, ask for a supervisor!
High credit card balances
Next to negative credit listings, high card balances are the worst. If you keep your balances in check, owe fifty percent or less of your limit, then your score should go up.
Closing accounts when your score is low
Don't do it - unless you have lots of cards (4+) and zero balances on all of them. Closing accounts shrinks you overall credit limit and increases your debt to limit ratio.
How much you owe compared to the card's limit. If you have a $5,000 limit and owe $2,500, that is a 50% debt to limit ratio. Add up all your limits and divide your total balance by your total limit. That is your overall debt to limit ratio. The lower the ratio, the better the score!
Credit card tips
- Ask for higher limits. Higher limits equal better ratios.
- Pay down any cards that are over the limit until they are within the limit.
- Start paying cards completely off one at a time. Don't close them.
- If you can't pay any more completely off, then pay as many as you can down to 50% or less debt to limit ratio.
- If you have the money, pay them all off!
- If you are going to close cards, close the most useless, until you have four or less. Make sure to keep the oldest card open.
- Typically credit cards report to the bureaus only once every three months. If you are in a hurry, then you can ask them to re-report your new account balances. If they tell you no, ask for a supervisor.
If your score is low because you don't have enough history, then start small. Start with the credit union, low limit cards, retail cards, jewelers accounts, etc. You can ask a close relative or friend to co-sign for you in order to kick-start a credit relationship. Remember to be careful with their good name! Pay on time, because it goes on both of your bureaus. Don't over do it. Four cards or accounts is plenty.
When you apply for credit, most creditors report the application to one or more of the credit bureaus. That is called an inquiry. Any more than a few inquiries per year can hurt your score a lot! New credit score procedures allow for applying for a string of auto or home loans in a row to count for only one inquiry (so long as they are within two weeks of one another). Getting a lot of inquiries deleted is extremely difficult, so wait a few months to allow those to age and the impact drops away.
Protect your identity!
When it comes to your credit report and your identity, it is better to be safe than sorry. Monitor your credit reports often and report any strange activities. Identity theft is one of the most costly crimes in the world today. If your identity is stolen it can literally years and years to get your credit report back to pre-event status. There are companies out there that can do this for you and save you a whole lot of time and money in the long run. Practice diligence and keep an eye on your personal information.