Are you looking for ways to raise your credit scores? Follows these 6 simple steps
If you are shopping for a mortgage or an auto loan, chances are you may never get a good deal or, you may be turned down if your credit sucks.
With bad credit, you’ll not be approved for a credit card or get a competitive interest rate for whichever loan you apply for.
The good news, however, is that you can improve your credit scores, and turn your situation around. It’s not as difficult as you think.
And in this article, you’ll learn what good credit is and the algorithms used to calculate it, some of the contributing factors to your bad credit, the negative impact of bad credit, and some simple steps you can take to raise credit scores faster.
What is a good credit score?
According to FICO, a credit score of above 720 is considered an excellent rating, and it makes you eligible for better credit card deals and loans with flexible repayment terms, lower interest rates, and huge amounts.
Anything below 679 is poor credit and shows that a borrower is highly delinquent.
Below is a breakdown of FICO credit ratings:
- 720+ – excellent credit.
- 680 – 719 – good credit.
- 629 – 679 – fair credit.
- 580 – 619 – poor credit.
- 579 and below – bad credit.
When making a lending decision, lenders and credit companies will always check your credit scores to know whether you are a high-risk borrower or a good investment.
Parameters used to calculate credit scores
FICO uses the following algorithms to calculate your credit ratings:
- Payment history – it’s important to note that timely payments raise your credit exponentially. Your payment history, therefore, includes things like account status, late payments, on-time payments, and any collection accounts on your credit report. It constitutes 35% of the total score.
- Credit mix – having a combination of several credit accounts is a great plus to your credit scores. It’s not enough to have credit card accounts only. Instead, include a student loan, personal loan, mortgage, or an auto loan. This will positively impact your credit by 10%
- Credit utilization ratio – always strive to keep your rate at or below 30%. Credit utilization shows the amount of credit you use to what is available to you. When your credit utilization ratio is high, it’ll drop your ratings and imply that you mainly depend on loans to survive.
- New accounts – it constitutes 10% and includes all the recently opened accounts and the number of inquiries made. Anytime lenders make an inquiry on your credit, your scores drop. If they are several inquiries, your ratings fall even further.
- Credit usage history – several new credit accounts indicates a shorter credit usage history. It helps to hold on to your revolving credit card accounts and lines of credit because they have a positive impact on your credit ratings. Credit usage history constitutes 15% of your scores.
Factors that contribute to a poor credit score
Bad credit can be as a result of the following elements:
Skipped payments of bills and huge credit balances
Anytime you pay your bills late or inconsistently you hurt your credit scores.
Usually, lenders will report late payments to credit bureaus, and that will have a negative impact on your ratings. Huge credit balances is also a contributing factor to poor credit.
Before lenders report your failure to pay your loans and credit card balances, they’ll try to get you to clear your debts through a third party company.
The collection agency will nag you with calls, emails, and messages. Some will even threaten you with legal action for you to pay your outstanding debts.
Even a collection account and a legal proceeding on your report affect your ratings.
If you, however, are still unable to pay, the lender will report your account as delinquent to the three major credit bureaus, and your ratings will inevitably drop.
- Many hard inquiries
Any time you apply for a loan or a credit card, the lender/credit card issuer will make an inquiry on your credit.
If your credit is subprime, they’ll undoubtedly reject your application. Such rejections will appear on your credit report as a hard pull, and they’ll dent your scores.
The more the applications, the more inquiries lenders will make, and the further they will deteriorate your ratings.
- Bankruptcy and foreclosure
If you recently applied for bankruptcy or had your asset sold by the lender to repay your debts be sure that it’ll appear on your reports for seven years.
Bankruptcy and foreclosure on your reports will impact your credit negatively.
The good news is that such information falls off your reports after seven years.
Signs that you are living in bad credit and need to improve your scores
Below are some of the glaring signs that you are living in bad credit:
- Your credit card application keeps getting rejected
Before accepting your request for a credit card, most lenders perform credit checks. If there is negative information on your credit reports like issues with delayed payment of bills, a collection account, or a defaulted loan, chances are your application will be rejected.
Several rejections indicate that you are a subprime borrower and lenders regard you as high risk, therefore, getting a loan or credit card, will be an uphill task for you.
- Credit card issuers keep increasing your interest rates
If you get a lender who’s willing to overlook your bad credit and approve your loan or credit card request, it will be at a very high interest rate.
Usually, lenders charge these high rates to cover the lending risk.
Such lenders will increase your interest rates without any prior warning. To them, you are a high-risk borrower, and there is no guarantee that you’ll pay your debts.
- Your credit cards get closed without warning
It’s okay to have one credit card closed, but if all your card issuers are closing their accounts, chances are that there’s something wrong with your credit reports. You can call your card issuer to know what’s wrong. Repairing your credit may help you get a true and accurate credit standing.
- Nobody is willing to co-sign a loan for you
If you have bad credit, chances are you’ll not get approved for a loan from any lender. Friends and family may also be unwilling to co-sign a loan for you because you are considered a risky borrower. You’ll need a credit repair to allow you access loans with better terms.
- Landlords keep turning you down
While some lenders may be lenient and may not overemphasize on your credit, some will be hesitant in renting you their apartments if you have negative items on your credit file. One late payment could be excused, but if you are always late on paying your bills, it’s an indication that you are highly delinquent.
With such bad reports, you’ll need to fix your credit.
- You get rejected for employment opportunities
Getting a job can be a real hassle. Having bad credit makes the search more unbearable.
With bad credit, getting a good job, especially in the financial sector can be a mirage.
Some lenders will check your credit reports before approving your job application, and any negative information on your reports will undoubtedly lower your chances of landing your dream job.
Easy steps to take to raise your credit scores
Fixing errors on your reports and improving your scores even by 100 points takes patience, hard work, and sacrifice.
The process is akin to a weight loss journey. It may be tough, but in the end, you’ll be happy that you didn’t give up.
Below is step by step procedure of raising your credit scores faster
- Know your credit scores
The first and most crucial step in fixing your credit is getting a free credit report from the government website www.annualreports.com. From the report, you’ll know your credit scores.
Carefully analyze the report, and if there is any false negative information on your report that does not give you an accurate credit rating, you have the right to dispute them.
- Raise a dispute to the credit bureaus
If you find errors on your report, raise a dispute to the credit bureaus, and make sure you present documents that’ll act as proof of your allegations.
The credit bureaus will contact your creditors to ascertain if your claims are true.
They’ll then contact you after 30 days with a new credit rating, or reject your applications if the negative information on your report is valid.
- Pay bills on time
To raise your credit scores, you’ll have to pay your bills on time.
If you lack the discipline, you can have the bills and debts directly debited from your account every month.
You can also make a budget and stick to it. Avoid impulse buying to free up some cash towards your debt obligations.
- Keep your credit balances low
Most credit companies charge high interest rates on credit balances.
Not paying your credit card bills on time, means the balances plus interests may quickly add up and get out of hand. This will negatively affect your credit scores.
To avoid such occurrences, pay your credit card balances on time every month, and if the accrued balances get out of hand, you could consolidate them by taking out a personal loan, and paying them off at once, then focusing on a single loan at reduced interest rates.
- Keep your credit utilization rate low
Your focus should be to keep your credit utilization rate at or below 30%.
Credit utilization rate indicates the amount of credit you use or are currently using.
To lenders, a higher rate shows that you are highly dependent on loans, and therefore, are a high risk.
Avoid taking several loans at a time and keep credit limits that you can comfortably repay.
- Change your spending habits
All the above hard work will go to waste if you don’t change your money management habits.
Live within your limits and take out loans that you only need and are sure you can repay.
Avoid impulse buying and instead of over-relying on loans, have some funds set aside for an emergency.
Bad credit sucks and will work against you on several instances of your life.
You’d do yourself a great favor if you repair your credit and work on improving your scores.