Repairing credit takes time and there are no quick fixes. To rebuild your credit you have to educate yourself on the situation you are in and how to get yourself out. Take this quick crash course to learn the ins and outs of consumer credit and how you can fix any damage you might have done.
Credit scores and reports
There are three credit bureaus: Equifax, TransUnion, and Experian. Each maintains files on millions of borrowers, and lists what types of credit they use, the length of time the accounts have been open, and whether payments were made on time. It also tells lenders how much credit you’ve used and whether you’re seeking new sources of credit.
Credit scores are summaries of the information on your credit report. There are many different scoring models, ranging from around 350-900, with high scores being better. A good credit score helps to qualify you for lower interest rates on loans. In addition, it may influence your ability to rent a house or apartment, get utilities, or even job offers.
How to build your credit score:
There are many factors that contribute to a credit score, and because they vary by scoring model, there is no one magic formula. We like to split the factors into three parts:
The first third is payment history. When you pay bills on time, your score goes up. When you pay late, your score goes down. Pay all bills on time, even utilities, doctor bills, and traffic tickets. Bills that go unpaid can be registered with the credit bureau or worse sold to a collection agency, which will seriously hurt your credit.
The second third is credit utilization. Utilization is the balance you are carrying compared to your limit. Try not to carry a balance on credit cards, but if you do, keep it under 50% of your credit limit.
The last third is a combination of the amount, age, and types of credit you’ve used. It’s best to have accounts that show you’ve been able to use credit responsibly for a long period of time, in a variety of situations. Applying for many new loans in a short period of time will raise red flags.
Last but not least, be sure to check all three of your credit reports each year to be sure there are no errors or fraudulent information. You can request to have these removed from your credit reports, which can have a positive impact on your overall score. Remember, checking your own credit report does not hurt your score.
Tip: if you need to build or rebuild credit but don’t qualify for a traditional loan or credit card, inquire with your bank or credit union about a share-secured loan or credit card. This type of account requires a deposit, but is a perfect tool to get started on the right path.
Raising your score after a poor mark on your report or building credit for the first time will take patience and discipline, but if you start today, you have just taken the first step to controlling your financial future.