Ok, so you’ve messed up. Maybe you lost a job, made an ill-fated relocation to another city, missed a payment or encountered an unanticipated medical expense. It can happen to anyone! Even if you’ve suffered a foreclosure, have had multiple charge-offs or late payments, you can have a better credit rating within a year. There are many ways of improving your credit and the good news is that the last year or two is most important in determining your credit score , so you won’t be mortally wounded from past mistakes forever.
Improving credit scores involves avoiding many things. In the order of importance, they are late payments, high credit card balances, closing credit card accounts and having too many in-store charge cards. Late payments carry 35% of the weight in terms of your credit score, so do not take them lightly, even if it’s just a store charge card, a cell phone bill or a rent payment. Your credit score can drop by as little as 20 points or more than 100 points, depending on how often you are late and how many accounts you’re late on, as well as whether you are 30, 60, 90, or more than 120 days late.
Secondly, your credit usage should be no more than 40% of what is offered to you. If your credit line is $1,000, then you should owe no more than $400, and that goes for all lines of credit you have open. If you have any maxed out cards, then pay them down until you hit the 40% mark! Some people think they should close out their accounts to “do the right thing” or “prevent overspending,” although this will decrease your overall credit offering and will reflect negatively on you.
Instead, work on paying those balances down and once you’re finished, aim to purchase one thing a year on those cards to keep them active, and pay them off right away. Lastly, opening and closing store charge cards just to get that 10-15% initial discount is a signal of irresponsible credit behavior and will not result in high scores for your credit.
While you’re trying to improve your credit rating, there are a few common mistakes people make. First, avoid asking a creditor to “lower your credit limit.” Some people assume that will mean less temptation to spend, when instead they should be exercising discipline, learning to live within their means and working at reducing the percentage of total credit used. Remember, you want to be using no more than 40% of the credit that’s extended to you, so by closing accounts you’ll actually magnify your debt. Secondly, don’t make any late payments, as the first one always hurts worse, sometimes by as much as 100 points. The subsequent string of late fees don’t take off as many points generally, but if you re-establish credit again, the worst thing you can do is to miss a payment. The third mistake is consolidating your accounts, since applying for new credit will take off 5-10 points. Applying for an installment loan will improve credit scores though.
To get a better credit rating, you may want to call in and ask that new, updated information be added. Lenders like to see that you have steady employment, so including your current employer could be an asset. You can also include your date of birth, checking account and current residence. If your credit report is missing accounts you regularly pay on time, then you can send the credit bureaus recent statements and payment history records to prove you’re re-establishing your credit score. You can also use a Chevron credit card to buy gas each month and pay it off in full right away.
