Managing your credit can be a hard thing to deal with for anyone. If you find yourself one of those people who cannot manage their credit, then do not worry. You are not alone. Your credit score may not be where you want it to be and you do not know how to fix it. In that case, you can improve it in different ways. There are several tips and tricks that can help you improve your credit score. You might even be working on fixing your credit without even noticing. This article will tell you about different tips that can help you fix your credit in an easy and painless way.
What is Your Credit Score?
If you want to fix or improve your credit score, then you should probably know what it is first. Your credit score is a number that can range from 300 to 850. In terms of credit score, 300 is a low score and 850 is a high score. This score defines your creditworthiness, as a consumer. Creditworthiness means how dependable you are when it comes to managing your credit. If you have a high credit score, then lenders will find that you are a good borrower who can handle their credit well. To calculate your credit score, you will most likely find this on your credit report. Your credit report is a history of your credit account information. Information about your credit account includes: active credit accounts available, amount of debt you have, payment history, and more. Typically, credit bureaus are the ones responsible for calculating your credit score.
There are currently two main credit scoring methods that credit bureaus use, which are the FICO credit model and VantageScore credit model. But, you will probably find that the FICO model is used more often than the VantageScore model.
What Factors Impact Your Credit Score?
The data that is presented on your credit report plays a factor in determining your credit score. There are five general categories that you will find this information falls under. Each category influences your credit report in a certain way. These categories include the following:
- Payment History (35%)
- Credit Utilization Ratio (30%)
- Credit History (15%)
- Hard Inquiries (10%)
- Variety of Credit (10%)
To understand how to fix or improve your credit score, you will need to understand how these factors influence your credit score and what they consist of. The first factor that determines your credit score is your payment history. Additionally, it is the largest component that influences your credit score, good, or bad.
Payment History
As mentioned above, the most important factor to determine your credit score is payment history. Your payment history accounts for 35% of your credit score. Payment history refers to late payments, the duration it took you to make these payments, payments you made on time; the accounts that went to collections, bankruptcies, foreclosures, and more! Lenders will want to understand how you are as a borrower. Payment history allows them to see what kind of borrower you are and if you are creditworthy or not. This is a very important factor that you need to constantly remain aware of, since it can significantly drop your credit score.
Credit Utilization Ratio
Your credit utilization ratio is the amount you owe compared to the total amount of available credit that you have. This is another important factor that determines your credit score at 30%. Your credit utilization ratio shows the amount of credit you use, as opposed to your credit limit. If you want to understand what your credit utilization ratio is, then we can show you.
Let’s say that you have 4 different credit cards and you are able to use a total of $2,200. The $2,200 is your credit limit. This limit will be compared to how much credit you are actually using. If your credit card balances on all 4 credit cards amount to a total of $1,000, then that is how much credit you are actually using. Your credit utilization ratio would be comparing your use of $1,000 to your limit of $2,200, which would be about 45%. A good rule of thumb would be to keep your credit utilization rate below 30%.
Credit History
You can think of your credit history as the age of your credit. The age of your credit includes different factors that relate to your accounts’ history. This includes: how long you have had credit, your oldest and newest account, the average age of your credit, and so on. With your credit history, you will find that it is not a very important factor in determining your credit score. It may account for only 15% of your credit score, but you should remain aware of it. In case you decide to close down any credit account, you might find your credit score decrease.
Hard Inquiries
Hard inquiries influence about 10% of your credit score. It might not seem like a lot, but you should keep hard inquiries in mind. You will find that there are two different types of inquiries: soft inquiries and hard inquiries. Soft inquiries do not influence your credit score. But, hard inquiries impact your credit score. Hard inquiries require written authorization from the consumer, which would be you in this scenario. If lenders want to know more about the risk involved with you as a borrower, then they will request from you to hard pull your credit. This allows them to check your credit information and normally happens during the underwriting process. Fortunately, hard inquiries should not be something you worry too much about and fall off after approximately 24 months.
Variety of Credit
The last factor that can influence your credit score is your variety of credit, which accounts for 10%. Similar to hard inquiries, this is not one of the most influencing factors. But, you should keep it in mind, nevertheless. A variety of credit refers to different forms of credit. You might find different forms of credit include credit cards, installment loans, store accounts, and so on. Even if you only have one form of credit, you should not worry too much about your variety of credit. A variety of credit means that you have better credit health and you have different credit accounts that you can use (or not use).
What is Considered a Bad Credit Score?
You are probably wondering why it is important to have a good credit score. What’s the worst thing that could happen with a bad credit score? Well, having a bad credit score can make it difficult for you to make large purchases. You will find it hard to purchase a home or a car, get a loan, and so on. If you have a bad credit score, then lenders will find that you are an unreliable borrower or a subprime borrower. Additionally, they might find that lending to you will involve financial risk. In the case that you are approved by a lender, you will still face higher interest rates than someone with a good credit score.
If you are currently using the FICO scoring model, then you will find that there are different categories to your credit score. Typically, anything below 669 is considered a not-so-great credit score. Credit scores ranging from 580 to 669 are considered fair. However, credit scores that are less than 580 are considered bad credit scores.
How to Fix Your Credit
The first thing you should do and the best way to understand your credit situation is through your credit report and your credit score. If you want to know your credit score, then you can find out through your credit accounts. Typically, credit card issuers offer their customers who have credit accounts the ability to check their credit score at any time. You will also find that it is free of charge.
Fortunately, you have the option to receive a free credit report once every year. You can receive your free credit report through the Annual Credit Report website. There are different ways that you can improve your credit score, especially if you find out that it could be in better shape. It might be overwhelming, but there are more options than you realize. Two of the most popular methods that people normally work on their credit are through personal credit management or hiring a credit repair company.
Improve Your Personal Credit Management
If you are a hands-on type of person and you want to personally manage your credit, then good for you! You can improve your personal credit management through the adoption of these lifestyle changes. This includes keeping your credit utilization ratio below 30%, paying off your debt, paying your bills on time, disputing any inaccurate information, and getting help from a credit counseling organization.
Dispute Any Inaccurate Information
Once you receive your credit report, make sure that you look for any errors that could be affecting your credit. You might find common errors such as identity errors, inaccurate account status information, data management issues, and more. In this case, it would be best to dispute these mistakes with credit bureaus. You might not think too much of it, or you might not believe that it makes a difference, but it does. Also, it is not a hassle for you. Credit bureaus are required to report accurate information on your credit report. So, pointing out any mistakes is well within your rights as a consumer.
Pay Bills on Time
Payment history is an important factor in determining your credit score. This is why you should make sure that you always pay your bills on time; it is the best way to improve your credit score. If you are the type to forget about paying your bills on time, then you should think about setting up automatic payments. On the other hand, if you do not have enough funds to manage your bills, then you will want to talk to your lender. Your lender could be more understanding of your current situation than you think.
Keep Your Credit Utilization Ratio Below 30%
As mentioned above, a good rule of thumb is to keep your credit utilization ratio below 30%. In case you want to see real improvements, then you should start by repaying your credit card every month. You should remain aware of your credit limit and your current credit usage at all times. This way, you will be able to maintain below 30% and improve your credit score.
Pay Off Your Debt
Unfortunately, debt is a problem that most people face these days. Common forms of debt are credit card debt, mortgage debt, student loans, and so on. These forms of debt can accumulate and you are left with a mountain of debt. To improve your credit score, you can work on a personal payment plan that will allow you to tackle each aspect of debt in your finances. Some people start with smaller sources of debt and move up, or you can pay the biggest source of debt and work your way down. This all depends on your current financial situation.
Hire a Credit Repair Company
If you think that you need a hand in fixing your credit, then you can always hire a credit repair company. A credit repair company will provide repair services for a fee. You should keep in mind that you can actually do these repair services on your own, without a credit repair company. But, credit repair companies have more knowledge and experience in credit repair. This could save you time and effort when it comes to fixing your credit.
Conclusion: How Long Does it Take to Rebuild Your Credit?
In conclusion, you should definitely do everything you can to improve your credit. If you already have good credit, then you should do everything you can to maintain it. In the case that you need to rebuild your credit, you should do your best to keep your credit utilization ratio below 30% and pay your bills on time. Additionally, you should work your way to repaying your debt one by one or take out a debt consolidation loan. There may not be a definite time frame to fixing or improving your credit. But, one day you will wake up and your credit score will be good and your financial situation will improve.
