Your FICO credit score is of prime importance when it comes to accessing credit, loans and advances. Your credit records actually decide your propensity to get a loan, to get favourable interest rates and the loan amount and tenure. It is built over a period of time, reflecting your financial habits, discipline and health. If you have a not so good credit score, say below 650, then it is high time that you take a look at your scores, and take steps to improve them quickly, or at the earliest. This article will not only help you to increase your credit scores, but will also help you to plan your financial activities, future payments, and buying of credit products, as you will be informed on how the credit scores work and how they are calculated. Working on them doesn’t take much of your time, but having the knowledge on how to improve them is important. Check out our guide to increase your credit scores, repair your bad financial records that may have occurred, and to have a healthy financial FICO and Vantage score to be accessed by credit houses and banks.
First, let’s see what factors constitutes your credit score history, and what are weightage or importance of these factors:
As you can see, the most important of all these factors are payment history, which means loans and credit card servicing and repayments. You have missed EMIs, made late credit card payments, have financial civil cases against you, etc, your scores will go down
The next most important factor is the amount of credit you utilize in your credit card, and/or your line of credit. For example, if you have a credit card of $10,000 limit, then you should not be using more than $3,000 from the same. More on that later in this guide for improving your credit score.
Age of credit accounts works linearly, the longer the credit account, the more history it has, and the more value it carries. If you have a long standing credit account like home loan, and you have neatly serviced it all through, then it is going to have a very good positive impact on your score.
Credit mix is the different kind of credit you avail. For example, a person with credit history of a housing loan, a credit card, and a small business loan, will be more valuable, than with a person who only has 5 credit card accounts.
New Credit enquiries are the enquiries a credit provider makes on your credit score, when you approach them for a loan. For example, if you have applied for a re-mortgage loan from 4 different providers, each will make a hard or deep enquiry, and each enquire will hurt a little bit of your score. Though it is not substantial, it still has negative impact. Soft enquiries (like you accessing your score) don’t have any impact. More on soft and hard enquiries, later in this guide.
Create a reminder system, digital, web or paper, to list down your payment dates. Always keep a day or two in hand, and make records accordingly. Set multiple alerts if possible, in your email and digital calendar, and in your mobile phone. Do not miss any payments, if possible, set auto debits in your bank as well. Pay credit card payments before due date, as close as possible after the bill generation.
Now that you have this basic system in place, follow the strategies given below, to repair your credit history, and to quickly improve credit scores:
Stretegy 1: A dedicated card for utility payments
Use a dedicated credit card to make all your utility payments, and always pay the balance in full. This should be preferably an old card of yours, that you have paid all dues and got it to full balance. This card should be used primarily for paying of utility bills, and when the bill is generated, you should always pay in full, even with a few dollars extra. This will have double benefit on your scores and records. It will have timely utility bill payments, as well as timely credit card payments.
Strategy 2: Get Credit limit increase on your credit cards
Call up your credit card companies and ask for credit limit increase. This increase, when granted, is not for your extra spending, but to take care of the second most important factor of Usage of credit as a percentage of credit available, as explained previously. Just by increasing the limits, on paper, you will be using a lesser percentage of credit available to you, keeping your expenses same.
Strategy 3: Consolidate your loans
If you have multiple small loans, that you have acquired over time, or multiple credit card unpaid balances, then a consolidation loan to pay off all those loans, and servicing the new loans will hugely boost your credit scores and records. Learn more about what to know before you decide on credit consolidation loans here. Just do not close your credit card accounts after you have paid them in full.
Strategy 4: No New Credit Cards
It is always tempting to apply for a new credit card when you get the offer. But avoid getting new credit cards, and service your existing ones instead with more payments if possible. Applying for new cards may result in making hard inquiries, hurting your scores.
Strategy 5: Old Credit Cards to Stay
Do not close your old credit card accounts. Rather pay some in full, use them very sparingly or don’t use them, but keep them active.
Strategy 6: Take care of your delinquent accounts
If you have delinquent accounts, charge-offs, or collection accounts, take action to resolve them. Carefully study them and decide what is better for you, whether to pay them off in full, or talk to the creditor for a settlement. Closing such accounts amicably result in better credit scores, and clears up the financial clutter you have.
Strategy 7: More than 1 payment to your Credit Cards:
This is a tip that can help you greatly, hiking your credit scores by up to 100 points. Just make more than one payment to your credit cards. At the same time, if you find any errors in your credit card statement, for example, reporting late payment though you have paid in time, call up your credit card customer care immediately, and get those errors fixed.
Strategy 8: Becoming an Authorised User for someone else’s account
Become an authorized user of someone who has excellent credit records. This is more like credit piggy backing. If you have a good friend or relative who has excellent credit records, just request him or her to make you an authorised user to their account or credit card. The person doesn’t have to give access to you to their account, or does not have to give you the additional credit card. But by just listing you as an authorized user, you will have a boost and improvement to your own credit scores.
Strategy 9: Get your revolving credit facilities utilization in between 7% and 30%
If you have a line of credit, also known as cc loan or overdraft facility, try and see you utilize not more than 30% of the sanctioned amount. Pay off the required amount to keep it within 30%, whenever your utilization cresses this limit. The same goes for credit card. Utilize not more than 30% of the credit limit given to you by your credit card.
Strategy 10: Check for your credit report, and dispute any mistakes on them
You may go to a website like www.annualcreditreport.com to access your credit report online. Check for any error, like missed due date payment, and if you think that the entry is in error, call up the bank or financial institute to get it corrected. Just correcting such errors will boost your score.
Strategy 11: Usage of a secured credit card
Some credit cards come with cash deposit security, and your bills are deducted from that security on time, which you will have to replenish. In essence, it is more like a debit card, but it builds your credit record as a credit card. Usage of these cards builds good scores on your report due to timely payment over time.
Strategy 12: Build a healthy credit mix of advance products
Your loan portfolio should have a healthy mix of secured and non secured loans, loans and advances and credit cards. If you only have credit cards and no other loans to consider, it is not good. If you have no credit cards, and only a personal loan, it is not good either. So build a mix of loans, mixing mortgage, auto, personal and credit cards.
Strategy 13: Take help of a credit monitoring service, stay safe
Credit monitoring services are generally free, and they help you in two ways: They keep track of you scores, reports you of any changes, enabling you to take corrective action in time, and they also report any new accounts open, helping you to take notice of any identity theft (pretty common these days), so that you can report the same to respective authorities, help close it, and to keep yourself safe from financial frauds.
Inquiries on your credit scores and to access your credit reports are of two types, hard and soft. Soft enquiries are typically of those types like you inquiring on your score, a potential employer checking on a potential employee, pre-approved offer generation by credit card companies etc. Soft inquiries have no effect on your scores.
Hard enquiries are for serious loan enquiries, like, when you have applied for a big mortgage loan, or a small business loan, a new credit card application by you, or even an auto loan. These hard enquiries check deep credit history, and a small part of your score also gets deducted, ranging from 5 points to 10 points. So, when there is a prospect for hard enquire judiciously. Also remember that any pre approved offer, of auto loan, personal loan, or credit card, has been done with a soft enquiry, and has not hurt your score. If you are hell bent on increasing your credit score, avoid applying for a new credit for a while, unless the new credit will help your scores, as in a consolidation loan
It depends on the factors that have hurt your scores. For example, if they are for missed EMIs, or delayed credit card payments, they can be improved in a few months time, with regular and increased payments. However, if you have missed payments on multiple accounts, have earned a defaulter status by not paying for a considerable period (3 months or more), foreclosure or repossession, then it might take more than a year to recover. Also, things like chapter 7 and bankruptcy stay in records for up to 10 years.
You will come across agencies that promise to repair your credit. But honestly, they cannot do anything more than what you could do for free yourself, by following the tips and good credit discipline. You could also fall prey to their malicious activity in which they advise you not to pay a particular debt, so that they negotiate it on your behalf and settle it hostilely, earning you negative credit scores, which will stay on your report for years. We suggest that you take care of your scores yourself, or through your trusted, qualified accountant, and stay healthy financially.
Keep the process of improving your credit score as a goal, and train yourself to the financial discipline required achieving it, and you will be happy with your financials always. It does not take much of your time, but requires your understanding, which is not complex to understand at all. Just build the right intentions, service your payments in time, take credit only to the extent you need, and more important, commensurate to your earnings, and you will not ever have to worry about your financial credit scores and reports again. Cheers!
Author: Surjendu Ghanty, MBA, Entrepreneur
* The views expressed in this article is of the author, and has reflected from his own experience over the years.