Bad Credit: 5 Things You Can Do Right Now To Start Fixing Your Credit
We live in a credit-driven society. You need credit for just about everything from buying a house to even getting a job. With so much importance put on using credit as currency, it’s really no surprise that so many Americans are swimming in debt. There are 22 different criteria for determining credit score, but unfortunately, the only ones who know the actual formulas are the credit bureaus themselves.With so little information on how to rebuild credit, people often make common mistakes that seem like the right choice, but in the end actually hurt your credit score even more.
If you’re in a situation where you need or would like to increase your credit score, you’ll want to try the following five actions you can take right now to get you started on the right path. Prior to doing any of these steps, however, you need to make sure you know where you stand. Odds are you wouldn’t build a house without a blueprint. In the same vein, you wouldn’t want to try to make changes to your credit if you don’t know exactly what needs fixing. Therefore, before starting these steps you’ll want to get your credit report.
Quick Fix #1: Check for Errors
One of the most common sources of a bad credit score can be attributed to reporting errors. The first thing to check, after any obvious errors, is to make sure your credit limits are being reported correctly. Your credit score is affected by your utilization rate, which is based on the percentage of your credit limit you use each month. If your credit limit is not being reported correctly, your utilization rate will be off and can significantly harm your score.
The other main error to check for is duplicated notices on a single collection account reported as active. Often a collection account will be transferred to more than one collection agency to be handled. There’s no real issue with this fact, and all of the collection agencies might be listed on your credit report. That’s normal, and all but the agency currently trying to collect the debt should be listed as transferred. But if more than one collection agency is reporting the collection account to the credit bureaus as active, you have a problem. If this happens, the one collection account is reported as two separate accounts and therefore contributes to a lower score.
Quick Fix #2: Start Reducing Credit Card Debt
This fix should seem like a no brainer, but it’s often overlooked because it’s never really explained why the amount of your credit card debt is so significant. We like to call this tip the 30/30 rule. 30 percent of your credit score is based on your outstanding debt, and if your credit balance is more than 30 percent of your credit limit, your score is going to drop. If you’ve racked up over 30 percent of your limit in debt and you’re only paying the minimum monthly payment each month, you’re score is going to drop – regardless of how “on time” you were each month. With this information in mind, it’s imperative to reduce your credit card debt as much as possible to maintain the 30/30 rule.
Quick Fix #3: No Credit = Bad Credit
Credit scores are created based on information from your credit history. If don’t have any credit history, there’s nothing to base your score off of. This isn’t a case of being innocent before proven guilty. When it comes to lending money, there aren’t many resources that are going to hand over a wad of cash if they don’t know whether you are a good investment or not. Think of it this way: Let’s say you needed heart surgery, and you met a guy who said he was the best heart surgeon in the world. He might be the best heart surgeon in the world, but if he had no credentials and no references, there’s no way you’d ever let him open up your chest. Likewise, you’d never let a guy who lost his medical license open up your chest.
The credit scoring bureaus think of you in the same terms. If you don’t have credentials, they consider you high risk. You have to give them information by which to judge you. To be sure you’re giving them enough information to properly judge your risk, you should have three to five credit cards and an installment loan.
Quick Fix #4: Authorized Users
If you’re in a situation where you either don’t have a lot of credit, or have fairly bad credit, you may want to explore getting added as an authorized user. As an authorized user, you get added to a relative’s (preferably one with the same address) credit account. This allows you to piggy-back on their good credit standing and reap the benefits. This only works, however, if the credit card company reports your status as an authorized user to the credit bureaus and if the outstanding debt on the card never exceeds 30 percent of the credit limit. Keep in mind, that while this is a great way to improve your score, if the account falls into poor standing your score will also be affected negatively.
Quick Fix #5: Use Credit!
It’s a natural reaction for someone to want to steer clear from something that has caused them harm in the past. In fact, it seems to make sense rationally that if you are having credit issues, you probably wouldn’t want to keep using credit. Unfortunately, this way of thinking couldn’t be further from the truth. For more information on why this is so important, check out the free ebook Credit After Bankruptcy & Foreclosure. You may not be experiencing these particular financial crises; however, the information is still valid for anyone looking to repair bad credit.