Banks use your credit score to decide whether your credit card or loan application should be approved. Not only that, your credit score will have a huge impact on the interest rate you get charged if your application is approved.
Banks aren’t the only businesses that use your credit score. Insurance companies use a version of your credit score to determine your insurance rate. Utility companies use your credit score to decide whether you should pay a security deposit. Some landlords even check your credit score to determine whether your rental application should be approved.
Credit Score Basics
Credit scores range from 300 to 850 with higher credit scores being better. The average credit score is 680. If your credit score is below that, then you have a bad credit score and won’t qualify for the best rates on loans. If your credit score is below 600, you may not be approved for loans and credit cards at all.
Your credit score is based solely on the information in your credit report. So, if you want to know what’s bringing your credit score down, you should check your credit report.
Your credit score is based on five key factors:
- payment history, 35% of your score
- level of debt, 30% of your score
- age of credit history, 15%
- types of credit accounts, 10%
- recent applications for credit, 10%
Ways to Improve a Bad Credit Score
Fortunately, a bad credit score doesn’t have to haunt you forever. There are some things you can do to improve a bad credit score.
Dispute Inaccurate Credit Report Information
One of the easiest ways to raise your credit score is to dispute inaccurate information from your credit report. Review your credit report for accounts that don’t belong to you and inaccurately reported payment statuses. There are some errors you might overlook that can hurt your credit score:
- Open accounts that have been reported as closed.
- Credit limits reported lower than they really are or not reported at all.
- Negative information that’s more than seven years old (or 10 years for bankruptcy).
- Accounts being reported as unpaid and delinquent that were included in bankruptcy.
Your name may be misspelled and your address and employer information may be out of date, but this information doesn’t impact your credit score. So you don’t have to dispute it if it’s wrong.
Pay Your Bills On Time
Your payment history has the biggest impact on your credit score, so paying your bills on time is important. No matter how many other late payments are on your credit report, from this point forward always pay your accounts on time. The positive payment history will help improve your bad credit score.
Getting rid of delinquent accounts can improve your credit score dramatically. If you have accounts that are 30, 60, or approaching 90 days late, bring them current before your credit score nosedives. Once a credit card account passes 90 days late, it hurts your credit score as badly as if it had been charged off.
Next, take care of accounts that are 90+ days late, charged off, or that have been sent to a collection agency.
Pay Off Serious Delinquencies
If you have a serious delinquency like a deficiency judgment from a repossession or foreclosure, a lawsuit judgment, student loan default, or an unpaid tax lien pay it off. The longer it stays on your credit report, the longer it will impact your credit score. These items fall off your credit report after seven years, so if the account is old (6+ years) you might wait until it falls off rather than pay it and reactivate the account.
Keep Account Balances Low
Keep your credit card balances low. The higher your credit card balances, the lower your credit score will be. You should always keep your credit card balances within 10% to 20% of your credit limit. That means a balance of $100 to $200 on a credit card with a $1,000 credit limit. Anything above that will bring your credit score down.
Pay down accounts that have high balances. If you have credit cards with balances that are above 20% of the credit limit, work on paying those down. Start with the accounts that are closest to the credit limit because these are hurting your credit score the worst.
Use Your Credit Cards
Keep your credit cards active. When you stop using your credit cards, your credit card issuer stops updating your credit report and that account is no longer included in your credit score. That’s not ideal when it’s an account in good standing, no late payments, and a low credit card balance. Use your credit cards periodically to keep them active on your credit report and to keep your credit card issuer from closing them.
If you don’t have a credit card, consider opening a secured credit card which requires you to pay a deposit against your credit limit. Make sure the card reports to the credit bureaus and doesn’t list the account as a secured credit card. This will help you build a positive payment history that will improve your credit score.
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