Nobody's Perfect: Tips for Rebuilding Your Credit Score
If you’ve lapsed in making a car payment, been late paying a credit card, have less than perfect credit, fear not. There are many things you can do to improve your credit rating.
There are many misunderstandings about credit scores. Some people mistakenly believe that they don’t have a credit score just because they currently have no debts, while others think that their credit score has no effect on their buying power. The fact is if you have a checking or savings account and pay bills, then you probably have a credit score. We’ve compiled helpful resources that individuals can review and use to help rebuild their credit scores.
What is a credit score?
A credit score is a three-digit number based on a person’s credit history of paying their debts on time. Banks, car dealers and credit card lenders use credit scores to determine the possible risk of lending money to customers. Higher credit score numbers often result in better credit terms and rates, as many lenders consider strong credit scores to be relatively lower risks. Higher scores can also mean less interest you will have to pay in the long run, especially on a mortgage for a house or a loan for a new car. When you apply for a credit card, personal loan or other types of consumer financing, the bank will typically run a credit report on you. If you rent, your landlord, utility companies, and employers will also have this information about you on file. So, it makes sense for consumers to nurture and protect their personal credit scores.
Different Types of Credit Scores
The most widely accepted credit score model is FICO, which is the acronym for the Fair Isaac Corporation. The company that began the industry standard credit scores, consumer FICO scores range between 300 and 850. The lower the number, the more you are likely to be considered a potential or higher credit risk to lenders. Higher FICO scores, on the other hand, usually means that you have proven your creditworthiness by paying your bills on time and will be approved at better interest rates. With a good FICO credit score, you can expect to save yourself tens of thousands of dollars in debt over your lifetime.
- Personal Finance Initiative – St. Anselm College
- New York Times: Why You Have 49 Different FICO Scores
What Affects a Credit Score?
Many people associate credit reports with receiving a report card in school. Similar to a grade point average, credit scores can dip, much like failing a class, if you are delinquent or default on a loan. The most common reason why people see their credit score go down is a late payment. Previous payment history greatly impacts your credit score. Late payments will subtract points from your credit scores, while payments paid in advance or on-time can potentially improve your rating by adding positive entries to your history. The more credit card accounts with late payments, the later the payments, the more negative the impact will have on a person’s credit score. Length of credit history also impacts your credit score. Young people just starting out, tend to have lower credit scores because people who hold onto their credit cards for a greater length of time are rewarded for being stable. Credit utilization ratio refers to the amount owned relative to credit limits. $3,000 of debt on a credit card with a $10,000 limit is 30 percent of a credit utilization ratio. The lower the credit utilization ratio the better your rating will reflect to lenders. Credit experts recommend staying below 20 percent, 10 percent is even better.
- Electronic Privacy Information Center
- Better Business Bureau
Tips for adjusting lifestyle and spending habits to improve finances
After a thorough evaluation of your income and debt, make a budget and stick to it. The biggest adjustment you can make in your lifestyle is to pay your bills on time. You will avoid late fees if you make a list of all your bills and build a good system for keeping track of what to pay and their due dates. In case there is an emergency and you cannot avoid making a late payment, decide which bills to let go. Different companies have policies for payments received after the due date. In some instances, no action might be taken until the bill is 90 days past due. If you are having trouble with spending, you can ask your credit card to reduce your credit limit. A FICO study of millions of credit files found that people who reduced their credit limit had higher credit scores. If you’re a homeowner, having trouble making ends meet, consider asking your bank to get a mortgage modification or arrange for a special payment plan. If your credit is too low, you may not be approved for borrowing, but you can circumvent this by finding a co-signer, usually parents or other family members with the same last name, to help you as well.