Credit is leverage, isn’t it? And that’s good. But the thing about leverage is that we often, and too casually, tend to slip into overindulgence. The National Foundation for Credit Counseling recently conducted a study. In the survey, it was discovered that more people would be willing to admit their weight, but they find admitting their credit status to be simply embarrassing. And worse, they’re not doing anything about it. They simply continue to play whip-and-pay with the plastic cards.
One of the unfortunate things about credit is that people don’t usually start to get concerned until it’s already screwed up. That’s when people head to Google and type in ‘Improve Credit Rating’ and other related search terms. The very nature of credit scores is that they have an increasingly disadvantaging power over our lives as they lower. It’s a kind of inverse proportionality relationship.
The thing is that your credit doesn’t usually get messed up overnight, but is the result of bad habits and neglect over time. You must take care not to repeat the mistakes you’ve made in the past if you hope to keep good credit once your credit is restored.
Your Score is like a GPA
There are many different types of credit scores. FICO scores and scores done by VantageScore are two of the most common credit score types. Besides these, there are also industry-specific credit scoring models.
When talking about a credit score, it’s important to know exactly what we mean here. This is like your report card but only in the financial arena. Unlike your GPA scores though, your credit score ends up with a number scoring, not a letter scoring. Just like you had a GPA in college, your credit score works very similarly.
If you have a low GPA, simply getting another A will not boost it up a lot. It takes a series of positive grades before you begin to see that number rise. Remember that search for ‘Improve Credit Rating’ I referred to earlier? Well, that is all about what’s referred to as your FICO score. This is a number that is assigned to you that ranges from 300-850. It works just like your GPA. Generally, a credit score rating of 700 is considered to be good. Your credit score is said to be excellent when it is at 800 and rises above that. A range between 300 and 500 is considered to be very poor.
Your credit score is generated upon request by you or by lenders, rather than stored as a part of your overall credit history.
It is calculated with a formula that uses the information in your credit report. Your credit rating tells lenders how creditworthy you are and how likely you are to pay back a loan on time. Credit score ratings can also be referred to as risk scores. This is considering the risk the lenders will be willing to take in offering you a loan or extending a loan repayment period based on the information they’ve pulled out from your credit score and credit report.
The higher your rating, the lower the interest you’ll pay on loans. The lower your rating, the higher the interest you’ll pay. If your credit is extremely low, you may be flat out rejected for loans altogether. Unfortunately, your credit report doesn’t always reflect an accurate score for you. This is because there are errors that even the credit bureaus make that often go overlooked.
So if you’ve suffered for mistakes you made yourself, or for the mistakes of the big three credit bureaus (Experian, Equifax & Transunion) this blog post is written to let you know that there’s hope for you 🙂
Improve Credit Rating -The How-To
There are many things you can do to improve your credit rating. Here are a few:
- Get a small loan:
Here’s what happens when you’re ready to obtain a credit card, or when you need to approach a lender for a loan to meet up with your major financial goals.
Any time a lender such as a car dealer, or a bank is going to lend you money, they first must assess your credit history and see how timely you were with previous loan payments.
If you have a bad history of mismanaging credit, or even if you have no credit history at all, it might negatively affect your chances of ever being issued a credit card, or of being granted a loan, or of getting favorable interest rates on your loans.
This may sound crazy, but get a small loan.
Just get a small loan from someone, even if it’s a high-interest loan and pay it back on time. Normally when you get a loan, you spend all the money on something and then must make the payments from income generated from your job.
With a small loan like this, you’re not going to spend the loan on anything. All you’ll do is throw it in a savings or checking account and pay it back in a timely fashion to develop a credit history. The idea is to gradually build up a good credit history of effective credit management and timely repayments. It takes some time to build credit, so begin building long before you need it.
This article also provides you ways to get your credit score up.
- Maintain a low credit balance:
Your credit utilization rate is how much you’re currently owing (i.e. your total debt) divided by your total available credit (i.e. your credit limit). In other words, it is a ratio of the total credit used to the total credit available. The result is expressed as a percentage. You can calculate your credit utilization rate as a sum total of all your credit cards or as a per card ratio.
Your credit utilization rate is always considered by credit scoring models when calculating your credit score. This makes your credit utilization rate one of the more influential factors in determining your credit score, as it accounts for up to 30% of your score.
If you’ve borrowed money from your credit card issuer but haven’t repaid, the amount you’re still owing is your credit card balance.
I always tell people to try their best to keep their credit card balances low.
What is especially damaging to your credit rating is when you max out your credit cards. That is BAD. It is usually best to have your credit card balance at or below 25% of your credit limits.
This one is something most people don’t know. It’s better to have ten grand in debt spread out amongst five credit cards than on one unless that one card has an exceptionally high credit limit.
Your best credit card balance, however, is when it is at 0%, meaning that you have not outstanding credit card debt. Always endeavor to pay off your credit card debts before account statement closure dates, otherwise the balance will still reflect.
3. Pay your bills on time:
When it comes to ways to improve credit ratings, this one may seem extremely obvious, but it is often overlooked.
PAY YOUR BILLS ON TIME! 35% of your credit rating is based on your credit history. Not paying bills on time can screw up your credit rating.
In order to do this effectively, first of all figure out how much your debts add up to, both credit card debts and non credit card debts, and evaluate how the number got there.
Next, check that sum against your monthly income. Your expenses must never be allowed to exceed your income, as this leads to negative cash flow. With a positive cash flow (i.e more income, less expenses) you should be able to dedicate yourself to making minimum payments on all your cards.
High outstanding debts reflects negatively on your credit score. Try as much as possible not to move your outstanding debts around or leave debts unpaid until they become seriously past due date and have to then be turned over (or sold out to) an internal collection department or agency. Such bad practices often take years to correct, sometimes up to 7 years or even more.
Improving your credit rating isn’t always as hard as you may view it; it is as simple as it has been explained above. Also, when seeking help, always remember that you are protected by the Credit Repair Organizations Act.
If you need more information on this topic, below is a free guide that will walk you through the process step by step and will also cover:
- Getting and Understanding your credit reports & scores;
- Real “how-to” for improving your credit (these are the very tactics the best credit repair firms in the country use);
- Powerful action plans.
To Better Credit!