Identify Why You Have A Credit Problem
If you obtain a copy of your credit report along with your credit score, you can find out if you have bad credit. Knowing that you dont have good credit is not enough. You need to know why you have bad credit.
For many people their credit problems may have been brought on by circumstances largely beyond their control like an injury or illness, unemployment, reduced income, or a separation or divorce. If this is what has happened to you, then skip ahead to point number 2. If you arent exactly sure why you have credit problems, then read on.
Some people focus on easy credit solutions like and dont take the time to figure out how they got into a financial mess until they are facing the prospect of a second or third bankruptcy. It is important to figure out why you got into the trouble you are in so that you can learn from your mistakes and not repeat the same mistake twice.
If you cant figure out why you are having financial or credit problems, speak with someone who can help you. Talk with a trusted friend or family member, a Financial Planner or a Credit Counsellor.
Understand Your Credit Utilization
The single most important factor in your credit score is something called credit utilization.
Sounds complicated, but it’s not.
One of the largest credit reporting agencies, Experian, explains this as follows:
…one of the most important factors in credit scores is how close your balances are to your credit limits. Credit scores add up the limits and the balances on your revolving accounts in order to calculate your overall balance-to-limit ratio, or utilization rate. The higher your utilization rate, the greater the negative impact on your scores.
You’re probably thinking that a fast way to boost your score instantly is to just pay off every single credit card and never use them, right? That’s actually wrong. Believe it or not, a 0% utilization is actually a bad thing.
In 2016, reviewed credit scores versus utilization ratios of its 15 million members and discovered a very interesting pattern.
People with 0% credit utilization actually had a worse credit score than those with 1–20% utilization.
What does this mean? It means that to build a credit score you should have plenty of available credit that you aren’t using, but you should try to use 1% to 20% of that total limit.
The rest of the actions in this article need to be tailored to your situation and your current utilization ratio. No one is starting from the same situation. For example:
What Can Be Fixed
1. Credit reporting agency errors
- Your name, date of birth or address needs updating.
- A debt is listed twice.
- The amount of a debt is wrong.
2. Credit provider errors
- Incorrect information about payments .
- Failing to let you know about an unpaid debt.
- Listing a default when you are in dispute.
- Not showing if a payment plan is agreed, or contract terms are changed.
- Mistakenly creating an account, or having one as a result of identity theft.
You can receive a free copy of your credit report once a year from credit reporting agencies such as Equifax and Experian. Separately to your credit report, you can check your credit score regularly and for free. Checking your credit score or report will not have a negative impact on your credit rating.
Moneysmart recommends being wary of paying that claim they can clean your credit report and have details removed. This may not be true. The Consumer Action Law Centre says that people who use these quick-fix companies could end up receiving inappropriate debt solutions and paying high or hidden fees.
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Does Paying Off Collections Boost My Credit Score
Historically, paying off your collections does not improve your credit score because a collection stays on your report for seven years. Newer ways of calculating credit scores no longer count collections against you once they have a zero balance, but it is not possible for you to predict which method your lender will use to calculate your score.
Dont Do Anything That Could Indicate Risk
Apart from missing payments, another thing that can create a dent in your credit score is paying less than youre supposed to. In addition to that, getting cash advances and using your card on things that can indicate future money stress can also negatively affect your score. One good example is paying an attorney for your divorce.
Before using your card, think about the risk it can create first. The last thing you want to happen is to create a risk that could scare your card issuer and your credit score.
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Deal With Collections Accounts
Paying off a collections account removes the threat that you will be sued over the debt, and you may be able to persuade the collection agency to stop reporting the debt once you pay it. You can also remove collections accounts from your credit reports if they aren’t accurate or are too old to be listed.
Impact: Varies. An account in collections is a serious negative mark on your credit report, so if the collector agrees to stop reporting the account it could help a great deal.
If the collector keeps reporting the account, the effect depends on the scoring model used to create your score. The FICO 8 model, which is most widely used for credit decisions, still takes paid collections into account. However, more recent FICO models and VantageScores ignore paid-off collections.
Time commitment: Medium. You’ll need to request and read your credit reports, then make a plan to handle collections accounts that are listed.
How fast it could work: Moderately quickly. On credit scores that ignore paid collections, such as VantageScore and newer FICOs, as soon as the paid-off status is reported to credit bureaus it can benefit your scores. In other cases, such as disputing a collection account or asking for a goodwill deletion, the process could take a few months.
Consolidate To A Single Debt
Maybe your issue isn’t an overload of huge balances, but an overload of small ones. Maybe you’re paying a minimum payment of $100 on five credit cards each carrying a balance of about $1,000. The credit reporting companies consider this as a hit against you.
John Ulzheimer, a credit expert who used to work for FICO and Equifax, explained to Bankrate that these are considered “nuisance balances,” and if you can consolidate them, you can boost your credit score.
There are two ways to accomplish this. If you already have very bad credit, then you should transfer the balances on the lower-limit cards to fewer higher-limit cards.
The second, and better, way would be to apply at your bank for a lower-interest personal loan, and transfer all of your low-balance, high-interest credit card debt to the loan. This is only possible if your credit score is good enough to get you a lower interest rate at your bank.
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Only Pay A Minimum Payment:
Obviously, a credit card can help us in our difficult times and, sometimes, we have to adjust it by making a minimum payment, but it is not recommended for each month. If you do not make a minimum payment or you should not do it for more than 2-3 months in a row. Always try to pay the full balance.
- If You Have A Debt Problem, American Debt Enders can get you on the road to Debt Freedom:
Hard Hits Versus Soft Hits
Hard hits are credit checks that appear in your credit report and count toward your credit score. Anyone who views your credit report will see these inquiries.
Examples of hard hits include:
- an application for a credit card
- some rental applications
- some employment applications
Soft hits are credit checks that appear in your credit report but only you can see them. These credit checks don’t affect your credit score in any way.
Examples of soft hits include:
- requesting your own credit report
- businesses asking for your credit report to update their records about an existing account you have with them
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What Is A Bad Or Poor Credit Score
In Australia, credit agencies including Equifax, Experian and Illion provide credit reports and credit scores. There may be slight differences in your credit score with each agency, and they are used by different lenders. The credit score bands used in Canstars free credit score tool are from Equifax:
- Excellent: 853-1200
- Average: 460-660
- Below average: 0-459
A credit score band of below average means you are in the bottom 20% of the credit-active population and are more likely to have an adverse event in the next 12 months than the wider population, on average. A credit score band of average means an adverse event is likely in the next 12 months when compared to the wider population.
For Experian, scores are ranked from 0 to 1,000. A Below average score that is likely to be considered poor by a credit provider ranges from 0549. A Fair score, which is still below the average, ranges from 550624.
For Illion, scores are also ranked from 0 to 1,000, with a Zero score indicating theres something negative in your credit history, such as a court judgement or bankruptcy a Low score of 1299 meaning you are likely to have some negative data on file and a Room for improvement score of 300499 implying your score still requires some improvement.
How Long Does It Take To Build Good Credit
Reaching a credit score of 700 FICO, a good start on a great score, takes about two years if youre starting from scratch. That means opening a few card accounts and charging on them and paying them off regularly.
Its more difficult if your credit score has crashed because those missed payments and collections stay on your credit report for years. Thats going to hold back your credit score but well talk about ways to get around it.
My credit score bottomed around 560 FICO in 2009 after missing payments on rental properties and credit cards during the housing crisis. By the end of 2010, I had built it back up to 660 FICO and was on my way to getting out from the bad credit trap.
Because bad credit is a trap. Lenders secretly love bad credit borrowers because who else can they charge 36% annual interest and they know theyll get it because the borrowers dont have any other options.
If youre paying 36% and higher rates, youre not able to do much else with your money so youre always going to be stuck in that bad credit trap.
Using the Ill talk about next helped me increase my score to 700 within 18 months of destroying my FICO and put on 200 points over the next few years.
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How Long Does A Poor Credit Rating Last
Your credit rating, or credit score, is based on the information shown in your credit report at a given time. Equifax gives the following timeframes for how long different kinds of information may stay on your credit report.
*Where you cant be contacted, a lender can immediately list the debt as a clearout and does not need to wait 60 days.
With bankruptcy, debt agreements and personal insolvency, when you enter into an agreement and when it ends can affect how long the information is kept on file. For example, Experian says a bankruptcy will remain on your credit record for five years from the date of listing or two years after discharge, whichever is greatest. If you pay an overdue debt, it will still generally be listed on your credit report for five or seven years . However, your credit report will be updated to show you have made payments, which could help your score start to improve.
How To Start Fixing Your Credit The 30 Days
The first thing to do is to figure out exactly what is on your credit report. I know it can be scary because you know its not pretty but you need to get your free credit report from Annual Credit Report, the only free credit report service by the government.
Once you know whats on your report, you can start disputing and negotiating those bad marks.
- Disputing a bad mark means writing a letter to each credit bureau telling them the missed payment, collections, etc. shouldnt be on there.
- Negotiating a bad credit mark means calling the creditor or collection agency to work out a plan and get the mark removed.
Disputing stuff off your credit report is easier but isnt going to work for everything. If there are any mistakes on your report, those will be easy but you might also be able to get a few missed payments removed especially if they are on closed accounts.
Understand that collections agencies and creditors just want to collect on the account, they dont care whats on your credit report. If you do have bad marks on your report, offer to pay 20% of what you owe if theyll remove it and close the account.
You might have to negotiate up to paying 35% of the debt but its a great way to increase your score and finally get out from under that debt for less than you owe.
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Maintaining A Quality Credit Score
Maintaining a quality credit score is just as important as fixing your score. When you organize your financial life in the manner noted above, you should keep your automatic payments going, never overspend and calculate your credit usage so that you can keep it below 40%.
Plus, you should reach out to your creditors any time you have an issue with repayment. Most creditors are happy to move payment dates, remove late fees and even set up a promise to pay that is gentler on your credit. After youve done so much work to improve your credit score, assess your current situation at least once a month to ensure nothing has fallen through the cracks.
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Each month you make a payment, theyll report to good behavior to the credit bureaus and youre credit score and profile will likely improve.
Disputing a credit report error can improve your credit. So can reducing card balances and How do I get my credit score up 100 points in one month?
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New Electronic Alerts From Your Bank
Some banks have started sending new electronic alerts to help you manage your day-to-day finances and avoid unnecessary fees.
Your payment history is the most important factor for your credit score.
To improve your payment history:
- always make your payments on time
- make at least the minimum payment if you cant pay the full amount that you owe
- contact the lender right away if you think you’ll have trouble paying a bill
- don’t skip a payment even if a bill is in dispute
Use ‘soft Searches’ For New Credit
When you apply for credit a lender will perform a hard credit search to check if you are eligible. This will leave a ‘footprint’ on your credit file, which will be visible to other lenders.
So it’s worth asking lenders to perform a soft search’ rather than a hard credit search when you’re looking to get new credit. This should give you an idea of whether your application would be accepted, as well as what interest rate you’d be charged, but won’t be visible to other lenders on your credit report.
More and more lenders are offering soft searches, including on loans, credit cards and mortgages.
How long will this take to boost my score?
Using soft searches won’t boost your score, but it can help protect it. By not using hard searches, your score will remain intact while you’re shopping around for a new mortgage, loan or credit card.
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Review Your Credit Reports
To improve your credit, it helps to know what might be working in your favor . Thats where checking your credit history comes in.
Pull a copy of your from each of the three major national credit bureaus: Equifax, Experian, and TransUnion. You can do that for free once a year through the official AnnualCreditReport.com website. Then, review each report to see whats helping or hurting your score.
Factors that contribute to a higher credit score include a history of on-time payments, low balances on your credit cards, a mix of different credit card and loan accounts, older credit accounts, and minimal inquiries for new credit. Late or missed payments, high credit card balances, collections, and judgments are major credit score detractors.
Use Credit But Use It Wisely
If a savings loan doesnt sound exciting to you, the other way to repair your credit is to simply use it wisely.
I know it sounds crazy simple, but really thats all there is to it. Pick one credit card, charge a small amount you can afford to pay back monthly and repeat month after month.
Never charge more than you can afford. The easiest thing to do would be to pay a small utility bill that youve budgeted for using your card. Then pay it off before the due date.
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