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Once you’ve made sure your credit reports are correct, the next step toward credit repair is to start paying each and every bill on time. Even if you’re just paying just the minimum amounts due, pay those at least. And right on time.
Just as delinquent payments and missed payments have a negative impact on your score, regular on-time payments have a big positive impact.
Simply put, the longer you pay your bills on time, the higher your credit score.
This is a relatively slow route to improved credit ratings, but it’s the one that works in the long run.
Creditors place a lot of value on consistent behavior. So if you do wind up being late on one payment down the road, having established a history of paying on time will make all the difference.
Whether they’ve had credit problems in the past or they simply don’t trust credit, many people think they’re better off buying everything with cash. But when it comes to credit ratings, this couldn’t be further from the truth.
Whether you’ve had a bankruptcy or some other tough financial situation, lenders want to see that you’ve been “rehabilitated.” They want to see that you’ve learned how to handle credit responsibly.
If you haven’t reestablished credit, you’re deemed just as risky as someone on the brink of collapse.
So, if you’re looking to improve your credit scores, don’t go from bad to bad. Use credit. Just use it responsibly.
Naturally, if you have several credit cards and they’re all maxed out, that makes lenders uneasy—which is reflected in your credit scores.
One of the faster ways to improve your credit score is to pay down the balances on your credit cards and reduce credit card debt.
Lenders like to see a nice ratio between the amount of credit you have available on your credit cards and the outstanding balances on those cards, also known as your utilization ratio.
As a first step, aim to reduce your balances to 75 percent of your total available credit. Then, over time, bring that percentage even lower.
Nobody knows what the perfect number is. Some experts say lenders would like your credit card balances to be about 30 percent of your available credit, or even as low as 20 percent. Other experts say 50 percent is okay.
Whatever a particular lender’s preferred number, all lenders want to see that you’re making progress on paying down your total credit card debt, not just moving it around from card to card.
But don’t go crazy. According to Consumer Credit Counseling Service (CCCS), a nonprofit community service organization that provides financial education to consumers (and which does receive some funding from credit card companies):
A good rule of thumb is to allow no more than 30 percent of your take-home pay for housing, and not more than 20 percent for debt repayment, including your vehicle payment.
Some people will tell you to get rid of any credit cards you aren’t currently using. And if you’re a shopaholic who can’t have a credit card without maxing it out, that’s probably good advice.
Fair, Isaac & Co. and other credit rating experts point out that if you want to improve your credit scores, think twice before you close out an account.
Instead, the best goal is to get your outstanding balances to about 30 to 50 percent of your total available credit.
For example, let’s say you’re thinking about closing an account with a $10,000 credit limit. Right now, your outstanding balance on your two other cards is $10,000. The credit limits on those two cards adds up to $15,000. If you get rid of the card with the $10,000 credit limit, then your ratio of credit to debt is 67 percent. If you keep the card, your ratio is 40 percent.
You can make the dramatic move of cutting up the card—but keep the account active. By keeping it, you look better on paper. You look further away from maxing out your existing credit cards. And that translates into a better credit score.
But you may not want to keep that third card with a zero balance. Some experts say lenders would rather see three credit cards at 20 percent of their limit than two credit cards with a zero balance and one at 80 percent of its limit.
Of course, paying down your balances will have a much better effect on your score than just moving those balances around. But spreading out the debt can have a positive effect.
The number of hard inquiries on your credit reports does effect your credit rating.
So, if you’re trying to improve your credit, don’t apply for more credit cards than you need—even if they do want to give you a free toaster oven just for filling out the application form.
A large number of credit card inquiries makes lenders think you’re planning to run up a lot of debt. Plus, they can’t tell how many of those accounts you’ve actually opened, since there’s a delay before new accounts show up on your credit history.
Another consideration: Having new accounts will lower the average age of your accounts. The longer your credit history, the better your credit score.
Most people only need two or three credit cards; so that's a number to aim for, if you currently have more accounts. Just remember you don't have to get there overnight.
It can improve your credit score to get rid of extra accounts. But, again, they key is to consider your utilization ratio before you get rid of any credit cards. Don't close two and leave two maxed out.
For the best effect on your credit ratings, if you are going to close out more than one account, do it slowly over a period of several months. When you've paid down your outstanding balances enough to consider getting rid of one of your cards, don't close out the account you've had the longest. Even if it has the highest interest rate of all of them, keep the credit card you've had for the longest time.
Lenders like to see a long credit history. So, if you close the one account you've had for 20 years and keep the two you got within the last three years, all of a sudden you look like a much newer borrower. This will adversely affect your credit score.
Also, check your credit reports after you have closed the accounts to make sure that they were reported as "closed by consumer." This will have the most positive effect on your credit rating.
If you're really trying to improve your credit score in a hurry, there are some other techniques you can use. For example, your credit reports will reveal the date each month on which your creditors report your information to the credit bureaus.
If you want to see how certain actions on your part will affect your credit score (both directly and indirectly), the best way is to use a credit score simulator. There are many of these; but probably the best-known simulator is the one Fair, Isaac & Co. provides when you purchase a credit score from it’s Internet Web site, www.myfico.com.
With these simulators, you can see how paying off an auto loan will affect your credit score, compared with taking that same money to pay down credit card debt or pay off a student loan. Or you can see how missing several payments will affect you.
You also can see how opening another credit account will affect your credit score. Or you can see how much your ratings will improve once a bankruptcy or a late payment comes off your credit reports.
As we’ve mentioned before, the passing of time will erase some of the black marks on a credit report.
If you have declared bankruptcy, after 10 years, it will disappear from your credit report. And many mortgage lenders will overlook a bankruptcy when making lending decisions after seven years.
Seven years is also the magic time period for late payments and charge-offs to disappear from your credit history.
However, according to the Federal Trade Commission (FTC), there are certain exceptions:
Credit information reported in response to an application for a job with a salary of more than $75,000 has no time limit.
Information about criminal convictions has no time limit.
Credit information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit.
Default information concerning U.S. Government insured or guaranteed student loans can be reported for seven years after certain guarantor actions.
Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.
The seven-year clock starts ticking the date the “event” took place, whether the event is a late payment or your account being turned over to a collections agency.
So, let’s say you were late on a payment in March, but then you caught up in April. The report of a late payment can remain on your credit history until seven years from that fateful March.
While time will heal your credit report, there are ways to improve your credit ratings without waiting (assuming you've changed your ways).
Note: If it has been nearly seven years since you had any late payments or charge-offs, you probably are better off waiting out the time until your credit score automatically increases.
But, if your credit problems are more recent, you can take steps to have charge-offs reclassified as something more palatable to lenders.
Keep in mind that, in order to accomplish this reclassification, you will need to pay off the debt in question-or at least pay part of the debt, if you are able to negotiate a settlement.
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