If you have bad credit, you know how difficult it is to navigate.
Bad credit can limit your options, whether you’re purchasing your first home or borrowing your next car. To make matters worse, your cost of borrowing increases significantly. For someone taking out a $200,000, 30-year mortgage – paying 6% interest vs. 4% increases your total interest paid by nearly $88,000.
But don’t worry. We have some tips to help get your FICO score back on its feet.
On-time payments are the largest contributor to your overall FICO score. And while most people are aware of the damage late payments can cause, many don’t realize that one missed payment can stay on your credit report for upwards of 7 years.
We recommend that you pay your balance in full each month. But we know things happen, and that isn’t always an option. However, you need to make the minimum payment. By doing so, your account will stay in good standing, which will keep your FICO score stable as well.
Many people don’t realize how spending close to your limit can hurt your FICO score. For example, if you have a $5,000 credit card limit and charge $3,000 to the card each month, that works out to 60%. Credit scoring models will still deduct points from you even if you pay off your balance in full each month.
The best is to keep charges below 30% of your limit. And considering credit usage is the second most important factor when calculating your FICO score, disciplined credit management will go a long way in boosting your score.
The Consumer Financial Protection Bureau (CFPB) recommends checking your credit report at least once per year. You can obtain a free copy through AnnualCreditReport.com. When you analyze your report, you can go through all of your accounts and ensure there aren’t any errors. According to a Federal Trade Commission (FTC) study, nearly 1 in 4 people had errors on their credit report that impacted their score. Also, 8 in 10 people who reported errors had it solved quickly.
A second reason to monitor your credit report is to protect against identity theft. If you notice strange or unusual activity on your report, catching it early will ensure the damage is kept to a minimum.
If you have unpaid accounts currently in collections, try and work with the lender to rectify the issue. If you ignore it, the lender will add a negative row on your credit report. Make sure you ask for a debt verification letter before making any payments to the lender. Delinquent accounts can be sold from one collections agency to another, and without the proper documentation, you may end up paying the wrong company.
The longer your accounts have been open, the more it helps your FICO score. It may seem counter-intuitive, but a long credit history displays a record that lenders can benchmark. When they see accounts that span several years, they’ll assume you’re a reliable borrower with a stable repayment history that’s proven over a long period of time.
Second, credit scoring models also analyze the average age of your accounts. And keeping your accounts in good standing over a long duration can provide a solid boost to your overall score.