How to Improve Your Credit Score Within 3 Years
When it comes to improving your credit score there is simply no quick fix. It will take time and effort and plenty of self discipline on your part. If your credit score is poor, it did not get that way overnight and it will not magically become the coveted 800+ score on all three bureaus in a few weeks either. It will take time and plenty of discipline! The importance of your credit score can not be overemphasized and will determine what type of interest rates you will receive if you should want to buy a home or a car, or even if you will get the loan in the first place.
Protect your credit!
Planning Your Journey
There are a number of things you should do before starting your journey. First, you need to know where you are starting from so it is time to order a copy of your credit report. Be sure to request a copy from all three bureaus as they do not always contain the same information. You will need to thoroughly review all copies and look for any errors or inaccuracies, especially loans or other debts that may have been paid off but are listed as active or contain incorrect balance information as well as any late payments that may be listed in error.
Next, look for accounts listed on the report that could be fraudulent. Credit theft is big business these days and many fall victim and do not even realize it until after considerable damage has been done. It is always a good idea to review your credit report regularly.
With that complete, it is time to get to work. If you have outstanding debts then the next step is to review the amount you owe and decide what you can realistically afford to pay each creditor on a monthly basis. Also consider the time frame that you want to reach your goal in and set up your payments accordingly.
Danger Signals Creditors Typically Avoid
Creditors look for certain danger signals when reviewing your credit history. Late payments, high debt to income ratio and bad debts are the most crucial in the eyes of the creditor. Although a high debt to income ratio is not preferable, it is not necessarily the kiss of death either. If all payments have been made on time and you have nothing in default, then your chances of securing a loan or line of credit improve and it will also help to build your score.
Another factor a creditor will examine is the length of your credit history. If you are just starting out creditors have no track record to base a decision on. Don't go crazy and apply for multiple accounts all at once. If you are shopping for a home or car loan, then multiple inquiries will probably be run on your credit history and this will show as inquiries for a single loan. On the other hand, if you are applying for multiple revolving credit accounts, this will also show up and negatively effect your credit.
Choose wisely!
Paying Your Bills On Time
The importance of paying bills on time can not be stressed enough! Of all the things a person can do to improve their credit score, paying bills on time is one of the most important. Potential creditors will review your credit history to see your performance with other creditors to determine what kind of risk you would present. Even if you have a high amount of debt, if there is no history of collections and all payments are current, you present a low risk. On the other hand, even if you only have a small amount of debt but have a history of habitually late or missed payments, creditors will be less likely to take the chance. We all like getting paid and they will view this as an unacceptable risk. Nobody likes a deadbeat!
Tip: Your payment history accounts for 35% of the equation used to calculate your score so be sure you pay your bills on time! Late payments and accounts sent to collections can have a devastating effect on your credit score.
Keep the Lines of Communication Open
If you are sitting under a mountain of debt and feel that you cannot meet the required monthly payments, the most important thing you can do now is to call your creditors. Explain your situation and see what type of payment arrangements that they will accept. Most creditors are much happier to take smaller payments from you than to not receive any payment at all. This shows good faith on your part and is a much better option than simply ignoring the debt. If you are unable to resolve these issues on your own, then it might be to your benefit to consult a legitimate credit counselor.
Reducing Debt
Once you have determined what and who you owe, you will need to set a goal for getting the debt paid off. Keep it realistic! It is a grand gesture to say you will pay $300 a month to each creditor, but if you have 5 creditors and only make $1600 a month, it will not take them long to discover that you are unable to meet your promise to them. Start by setting up a budget for yourself based on your income, allowing yourself enough to pay your monthly living expenses. Then decide what you can realistically pay to each creditor. This is where the discipline comes in. You need to stick to your commitment! It may seem insurmountable, but eventually those debts will begin to decrease.
One trap that many people fall into is to shuffle debts from one creditor to another by opening new lines of revolving credit with lower interest rates. While this may work for a while, it may also backfire, lowering your score due to the amount of open lines of credit you have. The amount of debt you carry influences your credit score, but many people don't realize that the amount of potential debt does as well. Even if you have no balances, if you have $15,000 in open credit lines, this means that you could potentially decide to max out those credit lines. If your credit is already shaky this could spell real trouble down the road. Keep revolving credit lines to a minimum and keep your balances low.
Bottom line: Reducing your debts and keeping the amount of open accounts you have to a minimum will help to raise your credit score.
Following these guidelines will help you on your journey to repairing your credit and raising your credit score.