Unfortunately, a credit score is a lot easier to damage than it is to repair. But learning how to fix bad credit may save you from embarrassing loan or credit card denials, or even from being turned down for a new job.
If you find yourself in a situation where your credit score has dropped due to late payments, excessive debt, or any of a number of other factors, it is key to take proactive steps to repair your credit by raising your FICO score. The FICO score is the industry standard for assessing an individual’s credit worthiness and is a numeric grade that is calculated from a variety of historical components around that individual’s payment history and credit management.
The FICO system is widely used, but it is far from perfect. Most lenders use the score as a starting point when assessing credit worthiness and will also factor in other intangibles when making credit decisions. These intangibles could include job and residence stability. But the process does start with your FICO score.
FICO scores range from 300 to 850 and the higher your score, the better credit terms you are generally eligible for. To get the best rates, you generally need to have a score at 700+. Anything below 600 is looked upon critically by potential lenders.
The first step when learning how to fix bad credit, is to make sure the information being used to calculate your FICO score is accurate and up to date. There are three major credit reporting agencies that generate the information used to calculate your FICO score. You can review that information by obtaining a comprehensive copy of your credit report. If you don’t want to pay the cost to obtain one online, you can get one free report per year from AnnualCreditReport.com.
Once you get your report, look it over carefully. Are there records of past due payments you can show you made on time? Are there accounts still listed that have been closed? Worse, is someone else’s account or address listed under your name? One reason to regularly check your credit report is to see if identity thieves have been opening accounts in your name. If you find any mistakes, write to the reporting agency and ask to have the information corrected. You should get a response within a few weeks. If not, call them to ensure the corrections get made.
OK, so now you know what your report says about you. Unfortunately, while the law gives you free access to your credit reports, you’ll have to pay to get your FICO score. Some lenders will provide your score when you apply for a loan. But if you want to know beforehand, you have to go to MyFico.com and pay $15.95. (You can sign up for a free 30-day trial once.)
What are the factors that go into calculating your FICO credit score and will they help you in learning how to fix bad credit?
The most heavily weighted component of the FICO score is your payment history. The single most important thing you can do to maintain good credit or begin to repair bad credit is to pay your bills on time. This includes all loans you currently have outstanding such as home mortgages, car loans, and credit cards. The later you are in making payments, the worse it is for your score. And closing an account that has a history of late payments will not erase that history.
The next biggest factor in the FICO calculation is the total of how much you owe. This includes the balances on all outstanding credit cards, car loans, and home mortgages. The easiest way to control this component and begin restoring your credit, is to pay down credit card balances.
The next largest factor in the FICO credit score calculation is your percentgage of borrowing power used. If you’re at the max limit on your credit cards, even if you are making payments on time, it represents a risk that you are financially strapped and at risk of being unable to maintain a timely payment schedule. Once again, pay down your credit cards to alleviate the impact of this component.
The last three components of the FICO score are more lightly weighted in the calculation, but are still important. The first is length of credit history. Lenders like to see a track record of good credit. The second is new credit. Opening up a lot of new accounts in a short period of time is a risk indicator to a lender. The third is the types of credit you maintain. There are two primary types of credit - revolving and installment. Installment loans such as car loans and mortgages are typically fixed payments for a fixed period of time. Credit cards don’t have fixed payments and are open ended. These are called revolving credit accounts. A lender likes to see that you have good payment experience with both types of credit.
When evaluating how to fix bad credit, it is important to take immediate steps to verify credit reporting information, adopt good payment habits, and shore up credit account balances. Over time, these steps will ensure that your FICO score begins to rise.
Popularity: 90% [?]
Posted under How To Fix Bad Credit
This post was written by admin on April 13, 2009
