How to Improve Your Credit Score
Many potential home buyers are struggling with having low credit scores and are trying to find a way to improve the scores prior to applying for a mortgage. This process is not complicated and if you learn what negatively impacts your credit scores and which actions on your part can help, you will be able to improve your credit score quickly.
What Negatively Impacts Your Credit The Most?
Bankruptcies and Foreclosures
Bankruptcies and foreclosures are the worst thing for your credit. They will be with you for a long time. A chapter 13 bankruptcy says on your report for 7 years and a chapter 7 bankruptcy stays with you for 10 years. Foreclosures stay on your credit report for 7 years also but their negative impact on your credit score diminishes the closer you get to the 7th year.
Late Mortgage Payments
Late mortgage payments are going to be a huge problem for you if you are applying for another mortgage. This is the one payment that matters the most. Whatever you do, pay your mortgage on time even if it is a partial payment.
High Credit Card Balances
High credit card balances (revolving credit) also negatively impact your scores. It looks like you are over leveraged. Below we will describe how you should deal with this and our technique in this area will really help to improve your credit scores.
Late Auto Loan Payments
Late car payments are also a big negative on your credit report. However, you are better off being late on a car payment versus your mortgage. Read [Getting a mortgage with a car loan]
Many Recent Credit Inquiries
Recent credit inquiries and activities will also have a negative impact on your scores. When mortgage lenders and auto companies are running your credit too often, it will trigger the credit agencies to make adjustments to your scores. If you open many credit cards, in a short period of time that is also viewed as a negative.
Get a Copy of Your Credit Report
Before doing anything, you will need to secure a copy of your credit report to see what is on it. You will be looking for things to improve but also for errors. You should get your free credit report from one of the three credit agencies. If you already spoke to a lender who ran your credit report, they must provide you with a copy. You can also get a copy of your free credit report here.
Reduce Your Total Debt
Reducing our total debt is important but we also recognize that it is likely a long term strategy and not something that can be done quickly. This is especially true with credit card debt when you can find yourself with increasing balances due to the high interest rates. For now, plan on not incurring any new debt.
5 Tips On How to Improve our Credit Score
1.Reading and Understanding Your Credit Report
Reviewing your credit report is the first thing you need to do. There are a lot of things on your credit report but the most important things to find are as follows:
- Account Number
- Credit Limit
- Past Due Amount
- Minimum Payment or Monthly Payment
Get familiar with these on your credit report for each of your accounts.
2.Increase the Available Credit On All Credit Cards
Credit card balances are not the only problem. The issue is really the percentage of your card balance versus the total credit limit on the card. If your balance on your card is close to your credit limit, then you are over leveraged and do not have much available credit. That is a huge negative and it will reduce your credit score.
*You want your balance to be less than 30% of your limit but even better if it is closer to 10% of your limit.
What you want to do is reduce your card balances OR reduce your credit card balance vs your limit (balance to limit ratio). Here is what I mean…
In the example below, the balance is about 66%% of the limit.
You can pay $1000 to reduce the balance to 33% of the limit but not everyone can do that.
Bonus Tip – In the example above, you can also call the credit card company and ask them to raise your credit limit to $6,000. Then your current balance of $2000 will be 33% of the total limit of $6000. Doing this with all of your cards will increase your scores significantly. In fact, you should probably call your credit card companies now asking for an increase in your limit.
3.Make On Time Payments
All payments from this point forward must be made on time. Do not even be a day late. If you cannot make the full payment, then at least send something. Late payments are much worse than a partial payment. Put your payment reminders into your phone and set an alarm. This is absolutely critical.
You also need to Manage your payments by looking at your credit report and strategically pay down certain accounts based upon what I mentioned above regarding the percentage owed vs your limit. So, if you only have a certain amount of funds to pay down your debt each month, do it strategically. Do not just send it all to ONE account.
4.Avoid Collections at All Costs
It is critical to avoid having an account placed for collection with a collection agency. Many people just think they can ignore the phone calls and notices. Then, your account is placed for collection and once that happens, it gets reported to the credit bureaus and your credit is immediately impacted.
The key is to avoid the collection by sending something. If you disagree completely with the charge, then keep communicating with them. Write letters indicating that you are trying to resolve the situation. If you are actively engaged, then they will not place your account for collection.
If your account is placed for collection, then communicate with the collection agency. You can negotiate a payment plan in exchange for having them not report the collection to the credit agencies.
5.Make Sure Your Credit Report is Accurate
Verify that all of the information on your credit report is correct. If you see an error, you should contact the creditor (ie your credit card company) that is falsely reporting it. You should also contact each of the three credit bureaus (Experian, TransUnion, and Equifax) to make sure they correct it in their systems as well.
This sounds like it can be time consuming, but it is worth it. You can also hire a company to manage this for you.
Long Term Credit Maintenance Advice
The number one long term credit maintenance strategy is to stop buying things that you really do not need. This is the hardest thing for people to do an it is even hard for people to admit to themselves that they cannot afford their own lifestyle. Just because your credit card approves a purchase, it does not mean you can afford the item or should buy it. Eventually, all of these purchase balances compound with interest and reach a total balance that you can never repay.
As you are trying to get your arms around your debt, you should not be adding to it at the same time. Here are some other expenses that can be cut back to help get debt and your credit under control.
- Stop going out to dinner since it is a luxury.
- Cut back on your cell phone plan
- Remove cable TV premium channels and services
- Re-negotiate or shop around for all of your insurance carriers
- Do not buy a new car. Continue to repair and drive the vehicle that you have or shop for a pre-owned car.
- No expensive vacations.
- No… you DON’T need the new iPhone.
Most people do not like to make changes like these and often get offended when it is suggesting.
Some of the tips shared above can have an immediate positive impact on your credit score. However, good credit is an ongoing process that you must always manage. It is a lot like your health in that you always need to work at it. I hope these tips help you to improve your credit score. Regardless as to whether you are successful in improving your credit score, we have lenders who can help if you have poor credit.
If you feel as though you need help or if your credit problem is much more difficult to deal with, then click to connect with Better Qualified Credit Repair. They are one of the most reputable companies in the industry.
Frequently Asked Questions – FAQ
Q: Do I need to hire a credit repair company to improve my credit score?
A: No, you can follow the steps outlined above to make significant improvements yourself.
Q: If I filed for bankruptcy, can I still improve my credit?
A: Yes, but it just may take a little more time.
Q: Will opening a new credit card help my credit?
A: Yes, but you have to make small purchases AND make on time payments. Paying the card down to a zero balance is important.
Q: Will a small collection item of only $25 harm my credit?
A: Yes, ANY collection will hurt you. So, although you may want to challenge a small payment like that, it really is not worth having it go to collections.
Learn What Negatively Impacts Your Credit Scores – This article will walk you through all of the things that can result in declining credit scores.
5 Mistakes First Time Home Buyers Make – Luke Skar