From transportation to living arrangements, your credit score affects every aspect of your life. If you have bad credit, there are plenty of things you can do to boost it. But where should you begin?
Before you start your credit repair journey, review your credit reports and identify any issues that you need to address. Not sure what to look for? Here are 5 things that could be keeping your FICO score down.
1. Credit Reporting Errors
Equifax, TransUnion and Experian are the top three credit bureaus. Together, they maintain the credit files of more than 220 million people throughout the United States. As you can imagine, it can be difficult for them to keep accurate monthly credit records.
According to a study by the Federal Trade Commission (FTC), at least 20 percent of consumers have a mistake on their credit report. It’s common for creditors to accidentally report inaccurate information to the credit bureaus. Credit bureaus have no way of verifying the information. Their job is to report the data that the creditors provide. It’s up to you to review your credit report for mistakes every month.
Errors that could be keeping your credit score low include late payments, loan/credit card balances and missing payments. If you notice any errors, dispute them with the creditor and the bureaus.
2. Charge-Off Accounts
It’s no secret that paying your bills on time can keep your credit report in good standing. Each time a creditor reports a 30-day late payment, your FICO score drops by several points. If you don’t pay your account within 120 to 150 days, the creditor could charge-off the debt. Not only can a charge-off debt destroy your credit, it can stay on your report for up to 7 years. Even if the charge-off debt is old, it can suppress your credit scores. This is especially true if the debt is a maxed-out credit card. Pay all outstanding charge-off debts. That way, they will no longer be in the position to hurt your FICO scores.
3. High Credit Utilization Rates
FICO uses a specific credit data model to calculate your scores. It consists of total debts (30%), new credit (10%), credit mix (10%), payment history (35%) and length of credit history (15%).
Another factor that FICO uses is how much of your available credit you are using. This is known as credit utilization. As a rule of thumb, it’s a good idea to keep your credit utilization under 30 percent. Here’s how it works. Let’s say you owe $500 on a credit card with a $1000 limit. For that card, the credit utilization rate is 50 percent.
High utilization rates are red flags for creditors. Maxed-out cards and high balances make it seem as if you need credit cards to maintain your lifestyle. Pay down your high credit card balances to under 30 percent of the total balance as soon as you can.
4. Not Enough Credit
The purpose of your credit report is to show creditors that you can manage your debt responsibly. If it’s been years since you have used credit, you may not have a credit score. Without a credit history, it can be challenging for you to get new credit. FICO has minimum requirements to calculate your credit scores. These include a credit account (tradeline) that is at least 6 months old. Additionally, the tradeline creditor must report at least 6 months of activity on the account.
5. Hard Credit Inquiries
There are two types of credit inquiries – soft and hard. When it comes to FICO score calculations, there is a difference between the two. Soft credit inquiries do not impact your credit scores. These types of inquiries occur when you, car insurance companies and cell phone providers review your credit reports.
Hard credit inquiries occur when you apply for new credit such as a car loan, mortgage debt, bank loans or credit cards. When you apply for too many credit cards at once, it can lower your credit score. Potential lenders can deny your credit application based on the number of hard inquiries on your credit report.
Your Credit Matters
Unless you have lots of money in the bank, you’ll need a good credit score at some point in the future. There’s never been a better time to repair your credit blemishes. Use these tips to fix your credit issues now and watch your credit scores begin to improve.
