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IMPROVING CREDIT SCORES

Your credit score affects every aspect of your life. A good credit score increases buying power for a home or car and helps you get approval for credit cards and loans. Unfortunately, when you have a bad credit score, you are deemed “higher risk” and this can negatively affect your ability to rent property or qualify for additional credit. If you’re lucky enough to obtain a loan or credit card, it will be at a much higher interest rate.
Good Credit Score

What is a credit score?

A credit score is a three-digit number that banks and other lenders use to determine your creditworthiness. In short, they use it to decide whether or not you are a financial risk. A credit score can also help banks make a final determination on the amount of money they are willing to loan.

How are credit scores calculated?

There are three main credit reporting agencies that lenders and creditors use: Experian, TransUnion and Equifax. While their numbers may vary slightly, they use roughly similar formulas to calculate a person’s final credit score value. The factors can be broken down as follows: 35% of the number is based on your payment history, 30% on the amount of money you owe, 15% on the length of your established credit, 10% on new credit, and another 10% is based on the types of credit you owe.

Factors that negatively impact your credit score:

  • There are several factors that credit reporting agencies use to determine the effect a late payment will have on your score. This includes how often your payments are late, how late the payments are, how recently the late payments occurred, and your current payment history.
  • Credit utilization is the ratio of the amount of credit you are using to the total amount of credit you have available. This accounts for about 30% of your credit score. If you have several credit cards at or near their available credit limit, the high utilization will lower your credit score. Since high balances are much harder to pay off, banks and others view it as a risk factor.
  • A lack of credit history can make it difficult to secure a loan since a lender has nothing to reference when it comes to your ability to pay the money back. If you don’t have a credit history, the credit reporting agencies have nothing to gauge your credit score.
  • When you apply for credit, whether a credit card or a loan, it creates an inquiry. If you apply for several credit cards or loans within a short amount of time, it can raise a red flag to a lender that you may be a high risk. While hard inquiries are only 10% of your overall score, multiple hard inquiries can cause a credit score to drop several points.

Steps you can take to improve your credit scores

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Bad credit follows you everywhere. It can hinder your ability to buy a home, secure a job, rent an apartment or even obtain car insurance. While late payments will remain on your report for many years, there are ways to improve your score faster.
  1. Review your credit report
    Since there is a human element that goes into reporting to the agencies, errors can happen. Reviewing your credit report at least once a year keeps you up to date on the information contained within it. If any discrepancies appear, you can take care of them quickly.
  2. Dispute errors or inaccuracies
    If you find an error on your credit report you should immediately report it to the agency. They will ask you to provide any additional information to help them understand the circumstances that may have led to an error in reporting. Make sure to keep a copy of your reporting of the error and follow up to make certain that they correct the mistake.
  3. Stay on top of your bills
    Your payment history makes up the largest percentage of your final credit score. In order to raise your score, you should aim to make all future payments on time.
  4. Pay off debt
    Paying down debt means that you owe less to creditors and as a result, are less of a risk. It factors into your overall score by reducing your credit utilization.
  5. Keep credit balances low
    Reducing credit card and loan balances affects your credit score positively. Paying your bills in full each month is the preferred method. However, utilizing 30% or less of your available credit will help to raise your credit score.
  6. Keep credit accounts open
    Your first impulse when you pay off a credit card may be to call and cancel the account. However, if you keep it open it will appear on your report as established credit with a zero balance. In fact, closing the account means that you have fewer accounts for agencies to use to calculate your overall credit utilization, and therefore can actually reduce your score.
  7. Avoid multiple credit applications
    While inquiries only make up 10% of your overall score, if you are at the cusp between good and fair credit, it can really hurt your buying power. While you can recover the points you lose, it can take up to 6 months for them to return to your report.

When will my credit score get better?

Your credit score didn’t become bad overnight and unfortunately, it will also take some time to improve. However, there are many factors that go into establishing your final credit score. As such, it really depends on which of these factors are affecting your score negatively and what you can do about them.

How long do negative remarks remain on my credit report?

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The length of time a negative remark remains on your credit report can vary depending on the type of accounts you have open and whether or not they went to collection.
  • Late payments
    Any late payment whether on a mortgage, a personal loan or a credit card can remain on your report for seven years.
  • Inquiries
    Hard inquiries, the ones that affect your score negatively, remain on your report for 24 months.
  • Delinquency
    Delinquencies remain on your report for seven years.
  • Settlements
    Even though you settled a debt and the payoff amount is accepted, it will still appear as a negative remark on your credit score for seven years.
  • Bankruptcy
    The two common types of bankruptcies are Chapter 13 and Chapter 7, Chapter 13, where you settle and pay back over time, remains on your report for seven years. Chapter 7, where your debt is completely dissolved, lasts on your report for ten years.
  • Public record
    Public records can include a foreclosure, a bankruptcy or a tax lien. A foreclosure will remain for seven years. However, as mentioned above, a bankruptcy can remain on your credit report for up to ten years and a tax lien also remains on your report for up to ten years.

When can I expect to see improvements in my credit score?

Since there are several factors that comprise your score, the length of time it takes to improve can vary. For instance, if your score is low due to a high utilization of credit cards then paying down the balances so they’re at or below 30% can improve your score within a few months. However, if your score is low due to missed or late payments, or charge-offs, which remain on your report for seven years, it may take a few years to get your score in a good standing.

The good news is that you can improve your credit score by paying your bills on time, paying down debt and using your available credit wisely.

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