August 24, 2016
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Whether you’re young and trying to build credit for the first time, or have a history of unpaid bills and are now trying to build up your credit score again, your life basically depends on a three-digit number. FICO scores range from 300 to 850. If your score is very good to excellent (750-850), then you’ll likely have no problem qualifying for low interest rates on cars, mortgages and personal loans. You’re in the fair to good range if your score is between 650 and 749, which means you’ll get decent offers. But if your score is under 650, you have some work to do.
If you do manage to get a loan with poor credit, you will likely have a secured loan with very high interest rates. This means that you’ll have to offer an asset (such as a car) as collateral, and the bank can take it away if you default on payments. So the best way to avoid this situation is to rebuild your credit score. The best way to do that is through timely repayments. Always pay at least the minimum payment on time every month. Even payments that are a day late can negatively affect your score.
So now you have an idea of what to do to improve your credit score, you need to be aware of what you shouldn’t do. Some common actions that you think will help you will actually hurt you. Avoid these eight mistakes if you want to improve your credit.
- Closing old cards. If it’s taken you years to finally pay off the balance on your credit card, you’ll likely want to celebrate. Don’t act too hastily, however. It’s OK to celebrate with ice cream or champagne, but not by closing the card. This is a common mistake that people make, and it ruins their credit score. Why? Because part of your score is based on your credit-utilization ratio. This refers to amount of debt you have based on the amount of credit you have available. Let’s say you have two cards with $5,000 limits. You pay off one card and close it, so you’re left with one card with $4,000 on it. Your credit-utilization ratio is now at 80% - way too high above the recommended 30% mark. But if you would’ve kept that card open, your credit-utilization ratio would have been at 40%. That’s still a little high, but it would have resulted in a better credit score. So keep your cards open even if you pay them off.
- Maxing out your credit. As mentioned above, you need to keep your credit-utilization ratio low in order to improve your credit score. Thirty percent of your score is based on this factor, so stop using your credit cards for a while on focus on paying down the balances.
- Avoiding loans and debts altogether. This is almost as bad as having too many credit cards. If you’ve never had a credit card or loan, lenders have nothing to base you on. They can’t tell if you’re a reliable person who always makes payments on time. In this case, no debt is worse than a lot of debt, especially if you’re in the market for a loan. It’s advised that you get at least one credit card and pay it off in full each month so you can establish credit. It’s OK to use credit cards, just do it responsibly.
- Having too many credit cards. On the flip side, you don’t want to have dozens of credit cards, either. This shows lenders that you have the ability to rack up debt very quickly – but who knows if you have the ability to pay it all off quickly? In this case, you’re better off closing store cards or any other cards you haven’t used in a while.
- Late payments. You want to show lenders you’re responsible, and consistently making late payments doesn’t help prove your case. Keep a calendar that shows when all your credit card and loan payments are due, and make at least the minimum payments. If you do happen to be a day or two late, send in the payment as soon as you can. You may wind up paying a late fee, but as long as you’re not over 30 days late, it won’t get reported to the credit bureaus.
- Seeking a quick fix. Watch out for companies claiming to instantly boost your credit score. While they may be tempting, especially if your credit is poor, don’t fall for them. There is no quick and easy solution. In fact, many of these companies will charge you for their services - when the last thing you need is more debt. If you need help managing your credit, a credit counseling service may be of help. Just be sure to check with the Better Business Bureau before choosing one, since many companies are not reputable.
- Not reviewing your credit report. Every year, you can view your credit report for free at AnnualCreditReport.com. Be sure to take advantage of this opportunity. Not only will you see what credit card companies are reporting to Experian, TransUnion and Equifax, but you can check for errors as well. Mistakes do crop up on these reports from time to time, and if it’s showing a loan you’re not familiar with, or missed payments when you know you paid on time, you can get these negative marks taken off your report and potentially see your score improve.
- Filing for bankruptcy. Bankruptcy is a drastic legal measure that should only be used as a last resort, after you have exhausted other options. In the event that you are overwhelmed with the amount of debt you have, a credit counseling service may be able to help. Negotiating with creditors is also something you can try. You may be able to lower your monthly payments or even your balance. Do all you can before considering bankruptcy, because it won’t help your credit score at all. In fact, you’ll it see it drop to its lowest levels for the next 10 years or so, so if you’re looking for a quick fix, this isn’t the solution.
A higher credit score won’t happen overnight. Building credit does take a lot of time and effort, but by avoiding these common mistakes, you may be able to one day get that low-interest loan or mortgage so you can have the car or home of your dreams.