Bad credit is not necessarily the end of the story for you when it comes to making a major purchase… at least, not if you start early to do something about it. Raising your score can be done, but in spite of claims, nobody can raise it magically. Lenders cannot be fooled with hocus pocus, though many consumers have fallen for credit repair schemes. Reputable credit repair companies can, over time, improve your score for a fee. Or, with honest-to-goodness common sense and good stewardship, you can raise your credit score yourself.
Here are some practical dos and don’ts you can begin doing today to pump some helium into that credit score, and let the air out of your interest rates:
The number one rule cannot be stressed enough… make payments on time. The closer you are to the time you will be seeking a loan, the more critical this becomes. A late payment within a few months of applying for a loan can hurt your score more than a bigger offense that occurred years ago.
If you’ve had late payments in the past, they will impact your credit score. The good news is, over time, that impact will lessen, provided you resolve to do better and eliminate those late payments. This applies not only to credit cards, credit accounts, and loan payments, but also to rent and utilities. Habitually paying those expenses late can come back to haunt you. Conversely, if you pay your rent and utilities on time, it could help.
If you are struggling, at the very worst, do not let a payment go beyond 60 days. Some lenders will not report the late payment after 30 days, but after 60 days, all of them will. Past mistakes will count against you, but you can resolve to pay every bill on time and eventually your score will improve.
Send payments to the payment address only. If you must send a payment to an alternate address, you need to send it well in advance of the due date. Otherwise payments may sit unposted for several days.
Have credit cards… but use them wisely. It’s better to have credit cards and a good payment record than no cards. How else will lenders know you can responsibly manage your debt? Even so, apply for credit when you need it, not when you want something you don’t have the cash to buy. Adopt the attitude that, if you don’t have the cash, you can’t afford it.
Keep your balances low in relation to your credit. A good rule of thumb is, balances should be no higher than 25 percent of your credit limit. That shows restraint. Some experts may advise you to transfer certain balances between cards to get them all below 25 percent. That could help, but obviously, a better plan is to pay down the balances if possible.
The Federal Trade Commission notes: "Because nationwide consumer reporting companies get their information from different sources, the information in your report from one company may not reflect all, or the same, information in your reports from the other two companies." Every consumer who requests it is entitled to one free credit report per twelve-month period. Scan every detail of each credit report to verify that the information is correct. If there are errors, dispute them. Genuine errors include misreported late payments, debts that have been paid but are reported as outstanding, and debts that are seven or more years old. Bankruptcies may remain on your report for 10 years, but all other errors should be disputed. This could take time, so don’t wait.
Three to six months before you plan to make a big purchase such as a house or a car, check your credit report again. As mentioned before, errors take time to fix, so you want to be prepared. Even after a credit reporting agency receives your letter of dispute, they may not respond for up to 30 days. And if you haven’t proven your case well enough, you may need more time.
Pay close attention to the "don'ts." Sometimes what seems like the right move is exactly the wrong thing to do.
Do not close unused accounts. Closing an account will not remove it from your credit file. That information must remain in your file for seven years. But the main reason to not close unused accounts is this: doing so will work against your credit score. Part of your credit score is based on your total available credit in relation to your debt. Here’s a practical example. Say you have two credit cards, one with a limit of $2,000 on which you have a balance due of $1500. You also have another card with a $1,000 limit, which you have paid off, owing nothing. Your total credit is $3,000 and your total debt is $1500, or 50 percent. If you close that unused account, your total credit drops to $2,000, with debt of $1,500… or 75 percent.
Creditors look at it this way: when you’ve used 75 percent of your available credit, you are very close to your limit. Either you have no financial self-restraint, or you have so little income that you couldn’t repay a loan if they gave you one. On the other hand, if you have used 50 percent of your available credit, that’s still a little high, but obviously a much better figure. Also, if you close an account and it happens to be one of your older ones, your credit life history will be shortened. So, if you don’t trust yourself to keep accounts open, cut up the cards, or somehow hide them, but don’t close the account.
You may have been told that having too many accounts can hurt your score. That’s true. But once they are open, the damage is done. Closing accounts cannot repair damage and may lower your credit score by making your credit shrink while your balance remains the same. If you have a lot of accounts and are seeking a mortgage, your lender may make your loan approval contingent on closing some of them. That should not be a problem, but don’t do it unless the request has been made, and the loan is approved.
Do not open new accounts if you will be in the market for a major loan in the next few months. Applying for new credit means the lender will do an inquiry on your credit. Too many inquiries in a short period of time can cause your score to dip since it appears you could be about to overextend yourself.
This advice may sound familiar… do not make your payments late. This should be a no-brainer. If you absolutely cannot make a payment on time, don’t let it go past 60 days.