If you’re struggling to maintain a decent credit rating (or if you have already crossed that line) you’re part of a U.S. trend.
A significant 56 percent of consumers nationwide have subprime credit scores, says a recent study. And that could cause some to be flat-out denied future credit, while others would have to accept less-than-ideal terms when taking out further loans, mortgages or insurance policies.
Your questionable credit history may not have been your fault, as you may have fallen victim to unanticipated expenses, a job loss, illness and/or adverse economic conditions. But improving your credit score should be addressed for the sake of your future financial health and your cost of living.
What can be done? Some may find their credit score relatively easy to raise themselves, while others will need professional help. Follow these guidelines to start down the road to recovery.
What's In a Credit Score?
Here are the most common factors that go into calculating a credit score:
- Payment History: Those who make payments on time and avoid having accounts sent for collection will have higher credit scores than people with less perfect payment histories.
- Credit Usage: If you live on credit, it will hurt you when you need to borrow money. We're not talking about those who pay for everything with plastic and then pay off the balance each month. We're talking about those who max out their credit cards and make only the minimum monthly payment. If you use credit responsibly and have plenty of it to use, your credit score will be higher.
- Credit History: If you've been responsibly using credit for many years, you've created a positive track record that will help your credit score. While it may not be fair, people with less than seven years of credit history often receive a lower score simply because they've had less time to establish positive credit history.
- Credit Applications: Every time you apply for a credit card or store credit, your credit history reflects the inquiry. This can be a red flag to lenders who may view it as trying to take on too much credit, whether or not you were approved. Therefore it's a good idea to limit your credit applications and hard credit inquiries.
How to Maintain an Effective Credit Score
Some best practices for a healthy credit or FICO score are as follows:
- Pay bills on time, avoiding hugely impactful delinquent payments and collections.
- Maintain low or no balances on your revolving credit accounts (generally 30 percent of the limit per account).
- Maintain a low utilization or balance-to-limit ratio, proving you can handle credit responsibly by spending only a portion of your available credit. Closing existing but unused accounts can improve credit scores, but doing so can also downgrade your score by decreasing your total available credit. Since those factors tend to balance out, experts generally recommend keeping open only used and needed accounts. If you do opt to keep unused credit cards, consider making regular, minimal purchases on each before paying off the balances immediately. Many card companies close unused accounts after a year, and some offers won’t be made again.
- Limit the number of businesses, lenders, retailers, etc. you allow to “hard check” your credit report. Certain parties can do so without downgrading your score, including you, your prospective employer, your utility companies and your bank or credit union. But multiple credit reviews from others may have be detrimental, and they remain on your report for two years. Fortunately, multiple checks made over several weeks of shopping for items like a car, home or student loan only count as one.
- Secure loans from your credit union for needed items (i.e. furniture or appliances) rather than accepting overly expensive debt from retailers.
How to Improve Your Credit Score and History
Those facing calls from creditors or other serious credit-related issues may need more targeted measures. A few suggestions:
- Moving credit card debt to another card may slightly increase your credit score by lowering your balance-to-limit ratio, but a better solution is paying it off via a personal or home equity loan, which makes it appear better on a FICO scoring model.
- Don’t be afraid to negotiate with lenders over your balances. Your debt may have been bought by a collection agency for pennies on the dollar, in which case compromises are possible. Any negotiated deals should be put in writing.
- Be patient. Once you start following best practices for managing your credit, the negatives on your report will begin to carry less weight, and most should be entirely expunged after seven years (some bankruptcies and unpaid tax liens remain for 10).
How to Fix Your Credit
If you’re unsuccessful in managing your debt after implementing a realistic budget and doing your best to negotiate with lenders, you may well need professional help to solve your problems. According to the Federal Trade Commission, your options include credit counseling organizations, debt settlement programs or the debt management plans (DMP) commonly offered by nonprofits.
The FTC recommends you vet any such organization first via your state’s Attorney General and/or your local consumer protection agency, which can inform on licensing and whether any complaints have been filed. After that, read contracts carefully to ensure you understand what the group provides, what it charges and how long results will take, getting all details in writing before proceeding.
The process of fixing your credit isn’t always easy, but it should eventually offer you peace of mind and relief from creditors. The sooner you can address your credit issues, the sooner you can start repairing the damage.