Fixing Credit Rating in 2016 – by Kyriaki Maria Grigoriou
There are various myths surrounding the ominous and ever-present credit scores, which seem to be able to reduce people into orwellian ranges of numbers. Well, in truth no one actually knows exactly how they work, but experts have concluded that the most reliable formula for the elements that make up people’s credit scores comprises of the following:
- 35% payment history
- 30% the amount that you owe vs your available total / your utilization rate
- 15% the length of your available credit history
- 10% your new credit
- 10% other factors
Thankfully, all of these issues can be taken care of by you personally, without ever having to rely on credit improving companies or services. We are going to help you get things in order, and we will also provide you with some facts that will help you make informed decisions about your credit score in the future, as well.
Making your payments on time
For starters, the most effective step you should start your quest for credit score improvement with, would be to simply pay all of your bills on time. Sometimes it can be tough, but paying your bills on time really does work wonders for your credit. Building a good credit history, with minimal borrowing but perfect attendance as far as payments go, will help you get loans, mortgages, credit cards and even insurance way easier. If you think about it, the bank is essentially trying to assess your financial habits, so that it can make an attempt at predicting your future behavior around money. However, don’t fret if you have made some mistakes in the past- there is no universal ‘black list’ for irresponsible clients, and even if there was one, we’re here to help you fix the problem, not run away from it!
So, it’s pretty clear that you should pay your bank on time, but should you really pay your credit cards in full? This is a bit unclear, but the general consensus is that no, you shouldn’t keep paying your cards in full (even if you are capable of doing so) if you intend to take a loan our in the near future, because even though you may think that by doing so you present yourself as the perfect client, the fact is that the bank ends up labeling your account as non-profitable (since you never pay any interest), and might, in turn, reject your loan.
Other sources claim that you don’t actually have to resort to paying interest on purpose, or to taking unnecessary loans in order to build up your score, because the only thing you really need is to keep your utilization rate low, and to make all of your payments on time. So, you could try both approaches and see for yourself which one gets you the best results.
Another good way of tackling the issue of timely payments is to set up a way to automatically pay the minimum each month, and then pay a little surplus in person, so that you stay a little above the recommended minimum. By never missing a payment, and by paying at least the bare minimum of 30%, you can start working your way up. However, we recommend paying at least a bit more than that, so that you can start bringing your utilization rate down.
For even faster results, you could try making two payments per month, even if you have to split the same amount in two, because of the way the bank’s snapshot system works; once per month, the bank will take a snapshot of your account, and take note of your current utilization rates. The problem is we don’t know exactly when that happens, so, by paying twice per month, you can make your account look better by default!
However, there may be some unforeseeable circumstances and draw-backs in the future, so there is always a chance that you will not be able to make a payment. The responsible thing to do in this situation, would be to sit down with your bank, be upfront and admit that you are facing some financial difficulties, and then try to work with the lenders, in order to create a new plan that will work for both of you. Remember: banks tend to avoid collectors agencies when they can, since they usually don’t get a lot of money back by hunting down their clients. This way, your temporary inability to make a payment will not end up hurting your credit score -or at least you will be able to do some damage control.
Lowering your utilization rate
Another easy trick you could resort to, in order to lower your utilization rate, is to get a new credit card, that you will only use a little bit. This credit card will increase your total available credit substantially, but if you don’t use it, it won’t increase the amount of credit you are currently using. By changing, for example, your utilization rate down from $1500 used / $2000 total to $1500 used / $3000 total, your credit score will improve substantially.
You should strive to gradually pay off the credit cards that are closest to the max, first, since your credit cards’ individual utilization rates count towards your credit score, as well! Whenever possible, you could opt for a debt consolidation loan, or you could even try transferring any large amounts to accounts or cards with better rates (as long as there are no transfer fees).
In general, you should keep your credit cards well below your limit, to ensure a raise in your credit score.
Creating a good credit history
A good credit history can help your dealings with the bank, and will eventually lead you to a great credit score. One of the easiest ways and fastest ways of building up your credit history is to become an authorized user to someone else’s account, provided that their credit history is good and stable. This way, their credit history is being reflected in yours, and the bank will see you in a more favorable light. It goes without saying that you should take care not to bring the original holder’s score down by indulging in irresponsible behaviors!
This linking system may backfire, though, since getting your name mixed up with people who behave irresponsibly might reflect back at you, too! So don’t let your flatmate pay your electrical bill late if your name is on there as well, because consistent late payments may bring your credit score down, too, even though it may be their responsibility, and not yours, to make timely payments. In that respect, you should always split your finances with your ex spouse as soon as you can after a divorce, so that you can have full control of the financial behaviors that reflect on your bank accounts and credit cards.
As far as good credit history goes, closing your bank account can -and will- break your history record. Unfortunately, the credit history that goes with your account will disappear as well, and your credit score will take a major hit! Never close a bank account, even if you have paid off everything, to avoid this problem.
Be present, be responsible, take action
By showing the lenders that you are on top of your finances, you appear more capable and reliable in their eyes. One simple thing you could do to achieve this, which many people overlook, is to personally check your accounts’ information, and to keep it as current as possible – ever-changing addresses and different telephone numbers per account can make you look disorganized and unreliable.
If you are in the US, you could even check your credit reports from Experian, Equifax and TransUnion, and dispute any incorrect information you may find.
As for your applications (for loans, cards etc), you should take care not to appear too desperate for loans, so make sure you space them out throughout the year, so that you don’t accidentally get rejected for making too many applications simultaneously.
By following these simple guidelines, you can start building your credit score up today! Don’t hesitate to ask any questions you may have, as we will do our best to answer.