Although radio show host, author, and financial expert Dave Ramsey says credit scores are not all that important, it’s an inevitable reality Americans have to live with.
After all, we love to spend what we don’t have.
A recent report by the Federal Reserve revealed that consumer debt in America had crossed the $4 trillion mark for the first time in history at the close of the year 2018.
The main drivers of the shocking figure are just as you suspected, revolving debt. That means credit cards and other short-term debt. According to the Feds, the closing quarter of 2018 saw revolving debt grow by almost $50 billion. More than double the growth of non-revolving debt, or long-term debt, which grew by $20 billion.
That means each adult American increased his or her short-term debts by approximately $250 last quarter of 2018, accumulating to over $5,000.
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In our view, insisting that credit score is not important is hiding your head in the sand.
However, we agree with Dave on one thing. Having a bad or poor credit score is worse than no credit score.
Unfortunately, if you are among the 68 million Americans with bad to poor credit scores, you are missing out on the benefits of having a great credit score. Not to mention the frustrations of dealing with distrusting lenders, landlords and in some cases, employers.
But you don’t have to remain in that state. If you are wondering how can I fix my credit score? You can take these seven steps to fix it, and keep it in great shape.
1. Understand How Credit Score is Calculated
The first step is to understand what a credit score is, its components, and how it is calculated.
Your credit score is a three-digit figure that gives an indication of how well you can repay your debts. Usually, a higher score means you are and have been repaying your debts faithfully and on time. Thus, more creditworthy. A low score means the opposite.
There are dozens of credit scoring agencies in the US. Popular brands such as FICO have credit scores that range from 300 to 850. Scoring higher than 750 means you have good to excellent credit score, whereas, if you score anything below 620, you are considered to have bad to horrible credit.
Your credit score is determined by a mathematical algorithm that takes into consideration your information on your credit reports from the three major credit bureaus.
All the companies that compute the credit scores use dissimilar algorithms. Therefore, it’s not easy to put a finger on how they come up with it.
Fortunately, you don’t have to figure out the nitty-gritty details about how to calculate the credit score. All you need is to get a good grasp of is what makes it swing up or down.
The FICO model considers the following components in order of their significance:
- Payment history.
- Total Outstanding Debt.
- Credit Mix
- New credit
Knowing how the weight and importance of each component enable you to know and focus your energies on the most significant aspects of your credit life in order to fix your credit score and keep it good.
2. Find out What’s Wrong With Your Score (extract, read and understand your credit report)
Knowing your credit score, what it is comprised of and how it is calculated in but just the first step. You need to dig deeper and find out exactly what is affecting your score.
You can only know this by reading and understanding your credit report.
By law, the three major credit bureaus are required to avail to your free copy of your credit report once in a year. All you need to do is to make a request at www.annualcreditreport.com.
You may come across other websites which claim to offer free reports. But, be cautious of these websites. The Federal Trade Commission (FTC) warns that many are often deceptive.
Other platforms such as Credit Sesame will help you understand your credit report, and have developed ingenious Apps to help you keep track of your credit score.
With your credit reports on hand, you can pinpoint which elements are bringing your score down. Thus take measures to stop them and keep them clean.
3. Dispute Errors
The credit report contains lots of information. However, the three major bureaus seldom have uniform information. The data is usually collated from your creditors and cumulatively used to make up your credit report.
In addition, the data may not always be on point. Sometimes the information contained in the credit report may be inaccurate, misleading or outdated.
That’s why we emphasize, you need to meticulously read your credit report and understand it.
If you come across any inaccurate or misleading info, you can, and you should it.
Every American has the right to dispute any inaccurate information appearing in their credit report.
Don’t worry about how you can do that. When you make a request for a free credit report, you will also receive instructions on how to file a dispute either online, via phone or through the mail.
However, disputes can be hard to pull off, and many people lack the skill, time or opportunity to follow up a matter with a large national bureau. You may need the guidance and help from an experienced agent such as Pyramid Credit Repair. They will walk with you through the process and help you to articulate your arguments.
Going at it alone may result in frustration since disputes are only allowed on specific reasons, and if you don’t have sufficient backing information, the bureau may decide to throw out your claim.
Nonetheless, if you have a legitimate dispute, the credit bureau is obliged to conduct an investigation and respond to your claim.
Alternatively, you can launch your dispute with the creditor, who is under the same legal obligation as the credit bureau. They are required to investigate and verify any dispute and if the information on the report is inaccurate or unverifiable, they are required to purge it.
A successful dispute is followed by correction by the primary bureau, which also alerts the other bureaus. According to a study performed by the FTC, 20 percent of consumers who had identified errors in their credit reports and launched disputes with at least one of the three major credit bureaus, experienced an increase in their credit score, further lowering their credit risk profile.
4. Stop the Hemorrhage (Tackle past due accounts and make on-time payments)
We can go on all day about how to fix your credit score by dealing with external issues. But, if you have a bad or poor credit score, you know where the shoe pinches. You need to get your act right and stop the hemorrhage.
Stopping the hemorrhage on your credit is the most practical way to fix your credit score.
You need to stay on top of payments and tackle any past due accounts.
Remember, the most significant element that contributes to your credit score is your payment history.
Therefore, you need to avoid late payments, defaults, repossessions (especially with auto loans) foreclosures, or third-party collections. So, start by making sure that all your current debts are up to date.
A credit history with charge-offs or bankruptcy will definitely hurt your credit score and may result in denial of new credit and loans. However, if you’ve been consistent in cleaning up the present, past accounts have less impact on your score as they grow older.
Therefore, as you get your act right on current debts, make plans to settle all historical bad accounts. After all, they are still your responsibility.
5. Bring Down High Credit Limits
As you work on getting the current accounts in shape, consider bringing down the high credit limits.
Remember, consumer debt in America is mostly driven by revolving debt.
That means we have an insatiable appetite to spend borrowed cash. Chances are that a higher credit limit will only entice you to dig yourself deeper in debt.
Credit scores typically look at how much of your available limit you have utilized. A high utilization (often over 30%) usually indicates a higher risk.
Whereas some advisors say that you should pick a higher credit limit in order to keep utilization ratio low. These are dangerous waters you don’t want to tread in, especially, if you’re looking to fix your credit score.
6. Reach Out to Your Creditors
One of the most effective ways to deal with bad credit is usually to discuss it with the creditor.
Creditors are in the business of making money from interests and fees. Seldom would a creditor turn down a client who is struggling with payments but reaching out and seeking an in-house solution.
It may cost you your ego, guts, time and much more. But, reaching out to your creditors is a definite must do.
You may need the assistance of a financial advisor or a debt counselor for this since you will engage in discussions that involve financial technicalities.
On the other hand, you may come across an item on your credit report that is not accurate and could have tried to remove it but failed. You can also reach out to the specific creditor and politely request them to remove it.
Creditors can give instructions to credit bureaus to add or purge information concerning their clients, and it may surprise you how far a polite request can boost your credit score.
7. Lastly, Keep Your Credit Score in Great Shape
If you’ve been wondering, how can I fix my credit score? The above measures will help you to claw back considerable points on your credit score. But you shouldn’t stop there.
You need to keep it in great shape, and you can achieve this by doing the following:
- Desist from opening new accounts: Each time you open a new account, there’s a ‘hard inquiry’ on your credit status which eats into your score. With your credit history, you may need to make a couple of requests with conventional lenders before getting a deal.
Consider an alternative that is ‘less hurting’ and will help in rebuilding your credit status such as Self Lender’s Credit Builder loans.
- You can also ride on credit coattails such as being added as an authorized user of your spouse’s credit card. You’ll get to enjoy a few additional points. However, if they falter or make late payments, your score will also take the hit.
- Don’t tear up your old credit cards yet. An often overlooked element of credit score is the period of your credit history. Closing a credit card account that has been active for more than 10 years will result in the loss of points on your score.
If you must close accounts, start by closing the newest accounts first.
- Lastly, make on-time payments. This is the one rule that will fix your credit score and keep it in great shape. Even a single late payment can tremendously hurt your score. Therefore, take steps to set up auto-payments and reminders that’ll ensure you don’t miss the date. If you have plans of setting up auto-payments, plan to set them up a few days before the due date so that you’ll always have a buffer period.
These measures will help you fix your credit score and keep it in great shape.