Credit is essential for many aspects in life. It’s not only essential if you want to get a loan for a car or a home, but most insurance companies and apartment complexes now check your credit before approving you to get a policy or move in. Employers are even beginning to check the credit history of applicants before offering them a position. With all these factors being dependent on having a good credit score, now is the perfect time to focus on fixing your credit. It’s beneficial to understand how credit is calculated for the most efficient results.
Your credit or FICO score is calculated based on five factors in order of importance. These are:
• Payment history – A direct history of how you’ve paid on your debts. Late payment history extends from 30+ days to more than 120 days past due. This is the biggest determiner of your score.
• Credit utilization – This measures how much debt you have in relation to how much available credit you have. Using more than 30% of your available credit tends to lower your score. A short-term way to bump your score is to pay
• Length of credit history – This is how long you’ve had an active credit history. A longer history gives more information. This is why many individuals opt not to cancel their oldest credit card, even if others have more favorable terms.
• Types of credit – An evaluation of the types of accounts you have such as student loans, medical debt or installment debt through credit cards
• Inquiries – Indicates how many individuals or companies have looked at your credit report in the past two years. Too many inquiries can harm your score.
Check your Report
You can’t fix your credit history if you don’t know what’s impacting it. Get a copy of your credit report from Experian, Equifax and TransUnion, which are the three credit reporting agencies. Federal law allows you to get free access once per year. It’s worth noting that reports can vary from one agency to another, so it is useful to get and compare all three reports at once. Dispute with each agency any errors or inaccuracies you think exist. This could significantly improve your credit score if there has been a reporting error.
Pay past due accounts
Work out a payment plan to pay off accounts that are past due. Paying your past due balances improves your payment history and prevents the debts from going into “charge-off” status, which occurs you have a debt that is 180 or more days past-due. Contact these companies to work out an agreement that you can afford. Many times they will take off some late fees or spread the payments out to help you get the balance paid off.
Pay the charge-offs
Charge-offs won’t be reinstated as lines of credit, but they will show as paid and creditors will see that you’re making an effort to pay back the money you owe. The balance will be $0 and show as paid. These take seven years from the date of the charge-off to get removed from your report.
Build some history
This is one of the harder things to do because if you have poor credit, creditors are less likely to extend an offer to you. This doesn’t mean that you’re doomed. Some companies specialize in no or bad credit loans to assist you. Secured credit card loans require you to put money down and then use that for charges, but the accounts are reported to a credit agency like traditional cards. Many will also raise your limit after a certain number of on-time payments because you have a positive record with them.
Bad credit can’t be fixed overnight or even in a month, but taking these actions will increase your score a little at a time. Your credit is something you’ll have for the rest of your life so it’s important to keep it in good standing and practice good credit habits. You’ll also enjoy the benefit of higher limits and lower interest rates with a better score and peace of mind knowing you have good credit.