Some credit repair counselors and financial advisors give the same generic advice about improving one’s credit – pay all your bills on time, pay cash whenever you can and put a little something aside in your savings account. Besides being too simplistic, this advice is not often possible and sometimes even detrimental to your credit score.
Once you really get under the hood of the credit score improvement game, you will find it to be somewhat confusing and often counterintuitive. Fortunately, there are proven strategies for improving your credit score, even if you haven’t been able to keep up and are seemingly stuck in the poor rating category.
Raise Your Credit Score Through Strategic Debt
There are those who would have you cut up all your credit cards and never borrow another dime for the rest of your life. If you have issues with overspending that may be sound advice, but for the rest of us it’s a little short-sighted. The big problem with trying to improve your credit score that way is that you will be severely limiting your possibilities for the future.
There will be times in your life that you will want to take on debt and lines of credit. You might need a new car, want to buy a house or have an emergency that requires cash. The ability to borrow is essential, and you need to preserve that ability. Creditors are not looking to see how little credit you’ve used. They are looking to see how you managed your credit lines and repaid debt. Stopping all borrowing will not improve your credit score.
Strategic debt means taking on debt that will help, not hurt, you. Once you have been able to catch up with your bills, continue to use two or three credit cards from time to time to improve your credit score. Keep your balance and your utilization ratio low. If you have a card with a $1,000 credit limit, don’t run it up to much more than $200, or about 20 percent. Not using all the credit you have access to might seem a little counter intuitive but that strategy will give you the points you need so you can better leverage that credit later on.
Improve Your Credit Score Through Better Money Management
Taking on strategic debt might be difficult if you have bad credit. Getting new credit when you have a poor credit history is tough, and if you are able to acquire it, your interest rates will likely be high. A second strategy to raise your credit score is managing the debt you already have more effectively.
No matter how bad your credit is, when you make a payment on time your FICO score will benefit. It may not be much at first, but the effect is cumulative. Conversely, making late payments can trigger late fees and over-limit fees that make paying on-time even harder, thus lowering the likelihood you will make the on-time payments that increase your credit score. This can create a snowball effect of one late payment turning into a series of late payments.
The recently passed Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) has helped by prohibiting over-limit fees, but there is a caveat. Cardholders are still able to opt in to be allowed to go over the limit. Opting in may seem like a good idea to give yourself extra credit availability, but then you open yourself up to additional fees. Avoid opting in for over-limit “protection,” and you will be more likely to stay on schedule and increase your score.
You can also help raise your credit score by avoiding the “easy fix” of trying to negotiate settlements. It is true that many lenders will agree to take partial payment to settle a delinquent account. In fact, according to MarketWatch, charge-off rates are at an all-time high, with an expected peak hitting 12%. This signifies that lenders are more willing than ever to negotiate settlements. While they may be tempting, settlements are detrimental to your credit score and should only be used by those with large amounts of debt that can no longer be managed.
To improve your credit, forego that settlement and instead work towards paying the entire debt. If you cannot pay the full expected payments, negotiate a smaller payment, but agree to pay the entire debt. In the short-term, this won’t help, but improving your credit score is a long-term proposition. Once you have paid the entire debt, even if you have done so through a year or two of monthly installments, your score will gain more points than if you had settled it for a lesser amount.
The Best Way to Improve Your Credit Score – Constant Vigilance
Finally, always be vigilant. Take advantage of the free credit report you are entitled to annually, and review each item carefully. Never assume that credit reporting agencies are correct and accurate. They make mistakes and can even get sloppy. It is not that unusual to find a mistake on your credit report; and when you do, you can have it removed.
Remember, time heals all wounds — even credit wounds. Do everything you can to improve your credit score immediately, and as time passes, those strikes against you will count less and less. In addition to your focus on repairing existing damage, focus on improving your situation so you don’t repeat the same mistakes that brought you there in the first place.
Start boosting your credit score today – get more information on strategies that can help you recover from a low credit score.