Whether you’re just being conscientious or you have some rebuilding to do, you should know that it is possible to improve your credit score. It might take some time but it’s a very worthwhile undertaking for your financial health.
Your credit score is something that is going to follow you everywhere from the minute your credit journey begins. It is a three-digit number that is calculated using a variety of factors about your financial life and it is a quick way for lenders to see if they’re willing to lend to you or not. Your credit score also helps them to determine things like the terms of your loan or credit card, your credit limit, your interest rate, and more.
Improving your credit score is something that is going to take time. It can take several years to raise your score back up to where you want it to be. Even though this is a lengthy process, it is absolutely worth it to help better your financial health going forward.
There are a lot of tips and tools out there that advertise that they will be able to help raise your score. In this article, we’re going to explore how your credit score is calculated, which of those tips are worth your time, and exactly how much time it might take to get your score back where you want it.
How Are Credit Scores Calculated?
When you’re not very informed about your credit history or how credit scores work, it can seem completely arbitrary and that makes having a less-than-stellar score even more frustrating. One thing that may shock you right off the bat is that you probably have a ton of credit scores floating around out there that you don’t know about. The reason for this is that there are three types of credit reports that you have for lenders to look at. These include FICO, TransUnion, and Experian. Once your potential lender gets that report, they apply a unique mathematical algorithm to those reports and that is what calculates your score.
The most common credit-scoring model is the FICO Score. Most models do tend to look at the same factors, though. The main factor is your payment history, which is going to show them how often you make your payments, if you do so in full, if you do so on time, or if you just didn’t pay altogether. The length of your credit history is also examined, which will show them how long you’ve had at least one credit account open; this is a smaller portion of your score.
Credit utilization is another one of these factors, and it is in second place in terms of how much it can impact your score. Credit utilization can be a little bit confusing but it basically looks at all of the credit that is available to you and how much of it you are regularly using. It may seem silly to have credit and be limited on how much you can use it, we understand. However, this helps lenders understand what your outstanding balances are, and keeping them low is going to help your score.
The other two factors are not as important as the others, both of them account for just 10% of your score each. These are your credit mix, which is how many different types of credit you have; and something called “new credit,” banks think it is a little bit of a red flag to open multiple credit accounts too closely together. They look at how many new lines of credit you’re opening to make sure that you’re not burdening yourself with debt.
What Can I Do If My Score Is Low?
If you’re dealing with a credit score that is below your goals right now, you’re keenly aware of just how frustrating and limiting it can be. The important thing to keep in mind is that bad credit isn’t the end of the world and now that you’re aware of it, you can get on the right financial track to fix it.
Experts all across the board will tell you that the single most important factor to help your credit score is to make sure that you’re making all of your payments on time. Establishing a positive payment history is important whether you’re building or rebuilding your credit; it is especially important if you know that you have any accounts in collections. Those collections are going to drag your score down, so making sure that you make all of your payments is going to help counteract the damage that does to your credit. This doesn’t apply just to your loans and credit cards, either. Making sure you get all of your bills paid on time and in their full amounts is going to show that you can afford your lifestyle, which is what creditors want.
If you do currently have accounts in collections, make sure that you try to get those resolved. That debt is going to drag you down and it is going to take your credit score down with you. You can call the collection agency, ask who the original creditor was, ask what you owe, and set up a payment plan. If you don’t recognize the creditor, you should dispute the account as soon as possible. Make sure that whenever you are dealing with collections agencies that you explicitly ask that the negative hit on your credit will be removed. Get this information in writing.
It is important to be smart not just about what you spend, but also what you owe. In order to keep your credit utilization rate low and help avoid massive amounts of accrued interest, you should work on paying down your cards with the highest balances first. To help keep your balances in check, try paying your credit card bill twice a month any time that you can afford to do so. This helps keep your credit use low, helps you avoid accidental late payments, and it goes a long way towards improving your payment history.
Another important tip is to monitor your credit reports. Check your score often, keep track of any inquiries made on your credit, make sure that everything is accurate. Mistakes can happen. If you’re dealing with a low credit score, you don’t want those mistakes to be dragging you down at the same time that you’re trying to get on track. You can dispute anything that seems out of place, and you will be able to see what areas you need to improve on by looking at your reports.
Your credit utilization rate, as you read above, is the second-largest factor that is used to calculate your credit score. Lowering your credit utilization ratio is also going to help you to get your score under control. Most financial experts recommend that you try to keep that ratio under 30%. You can do this by making sure that you pay down your statement balances. For example, if you have a credit card that has a limit of $6,000 and you owe $3,000 on it, your credit utilization ratio for that card is 50%. That’s much too high.
Another sneaky way to help lower your credit utilization is to try to increase your credit limits on your cards. For example, if you call up that credit card company and ask if you could raise your limit to $9,000, your credit utilization ratio would drop to 30% with a $3,000 balance. Asking for your credit limit to be increased does not create any inquiries on your credit and can’t negatively impact your score. The best way to keep this in check, though, is to make sure you are staying on top of your payments. For those of you with really low scores, try to aim for just 10% credit utilization as you’re working on getting back on track.
If you’re trying to raise your credit score, you should be careful about opening new credit accounts. Multiple hard inquiries on your credit will lower your score if you do not get approved. It can also hurt your score to open several new accounts in a short period of time.
If the situation is getting to the point that you feel it is a little overwhelming, you can also shop around for a debt consolidation plan. This is something that can and will bring your score down when you enroll. We know that sounds antithetical to the point, but it is one of the easiest ways for you to get a handle on your debt quickly. Instead of keeping track of multiple payments to multiple lenders or collection agencies, you could just make one easy payment. Just make sure you understand this option and know what you can afford before looking into it.
How Long Does It Take To Fix A Bad Credit Score?
The bad news about low credit scores is that they take a while to fix. If you have negative items on your credit report that are impacting your score, there is not much you can do beyond paying your bills and waiting it out. Delinquencies can stay on your credit report for up to seven years, car repossessions stay for up to seven years, and inquiries can stay on your report for up to two years. You can’t do much of anything to make those disappear faster. In the short-term, self-reporting and score-boosting tools may also help bring you up a few points.
In the case of delinquencies, you can try to get them removed faster by paying off the debt and getting the collections agency to agree (in writing) to remove it from your report. Most collections agencies will allow you to set up payment plans and may even allow you to pay a lower amount than what you actually owe if you can pay it off all at once. Inquiries that you didn’t authorize can be disputed. Any mistakes you see on your credit reports can be disputed and getting those knocked off can bring your score up a couple of points in just a few weeks. Credit reporting agencies have to investigate disputes within 30 days of them being filed.
Overall, the amount of time it is going to take for you to see the improvement you’re looking for is going to depend on how many negative items are on your report and, just as importantly, how many positive ones you can start putting on there by taking the right steps. You could see a noticeable improvement in just a few months once you start getting a handle on things but you should expect it to take a year or two to raise your score significantly.
Don’t let the amount of time that it’ll take to fix your credit discourage you at all. Working on this now is going to save you a lot of money in the form of interest payments and a lot of hassle later on. Low credit scores can create a barrier between you and financing a car, opening utilities at your home, purchasing a home, and even renting an apartment. Regardless of what your score is, keeping a close eye on it and being smart with your money will help bring it up and put you at ease.