If your car breaks down, what do you do? You fix it. If your computer gets a virus, what do you do? You fix it. The same can be said about any of the mechanical devices in our lives. Unfortunately, there are far too many people with a poor credit score who either feel no need to fix it, or simply don't believe it can be done. But nothing could be further from the truth. A poor credit score absolutely should be fixed - and it can be if you're willing to put forth the effort to do so. All it requires is some knowledge and perseverance.
The main reason repairing broken credit is so important lies in the fact that so many institutions we interact with use our credit score to evaluate who we are. Examples of entities interested in our credit score include:
- credit card companies
- mortgage lenders
- car dealers
- potential employers
- insurance companies - auto, home, life, etc.
A poor credit score will make it extremely difficult for you to do just about anything that requires credit. Believe it or not, it might also prevent you from getting a new job or getting a promotion you've been working so hard for. If you have a poor credit score you really need to do everything you can to repair it. Thankfully, doing so is not rocket science. In the following paragraphs we will give you some tips that can be used to help raise the sub-600 score to 700 or better.
Pay Down Your Balances
One of the things many people misunderstand about credit is that your indebtedness in relation to your limits has a drastic effect on your credit score. In other words, if you have a limit of $15,000 on one credit card, and your current balance is only $5,000, you're still in a better position than someone who has a credit limit of $5,000 and a $2,500 balance. In our example, the former individual has a balance to limit ratio of 33%; the latter individual, even with a lower total balance, has a ratio of 50%. The higher that ratio the lower your credit score will be.
In practical terms this means you should pay down your credit card balances as quickly as possible. If you have a little money left over every month after paying all your bills, it's better to pay down credit card balances than your mortgage or car loans. Not only do credit cards charge you higher interest, they also negatively affect your credit score if you constantly maintain a fairly high balance. Once your credit cards are paid down and under control, you can start putting extra money towards your mortgage or your car loans.
Refrain from Opening New Credit
Even with a poor credit score there will still be various lenders trying to get you on board by offering you new credit. If you're trying to repair a poor credit score the last thing you need is additional credit. Avoid the temptation to secure new credit cards, opening lines of store credit, or even taking out home equity loans. Every time you add new sources of credit you are most likely inclined to use those sources, which only add higher balances to your credit report.
In addition, if you absolutely must open new sources of credit while you're rebuilding, do so as discriminatingly as possible. What we mean by this is that you should refrain from simultaneously applying for multiple credit sources. Every time one of those credit sources checks your credit history, that's an indication to all the rest that you are seeking additional credit even while you're trying to rebuild. The more inquiries you have by lenders, the lower your score will be.
Make Your Payments on Time
The next thing you need to do to repair your own credit score is to make sure that all of your payments are made on time. That means if your mortgage is due on the first make sure the payment is in the bank's hands no later than that date. Even if your bank offers you a 15-day grace period, you want them to have the payment on the first of the month. That way, if a disaster ever does come up your 15-day grace period will provide you with a little extra time. On the other hand, if you're used to stretching out the grace period every month, you might find yourself in trouble if disaster does strike.
If you're having trouble making payments on time you might consider debt consolidation. Debt consolidation can be managed through a loan you get from a bank or credit card company to bring all of your monthly payments under one single payment. Typically this helps reduce your interest rates and make your monthly payment more manageable. If you're unable to secure a debt consolidation loan on your own you might be able to get one through a credit counseling agency.
If you're willing to consider a credit counseling agency, they can typically reduce the total amount of money you owe by negotiating with your creditors on your behalf. Then they roll the remaining balances into a single loan on which you make payments every month. This is a good way to get your finances under control and rebuild your credit.
Looking for New Credit Sources
Once your financial house is in order and you are making strides toward paying down your debt, it might be time to look for a new credit source to help repair your score. One of the best ways to do this is to purchase your next vehicle through a car wholesaler that self-finances. These types of car dealers will float you a car loan themselves and will usually require weekly or biweekly payments from you. Some of them even forgo interest because they're holding the loan themselves.
Creditors like this are ideal because they're not so worried about your credit score. They know where you live, and they're willing to repossess your car, so they're also willing to loan you the money you need without going to a bank. This might be one of the best credit sources you can use to rebuild a poor credit score. Other things you can do include purchasing your new furniture items from a rent-to-own store, applying for a secured credit card, and so on.
The last thing you need to know is that repairing a low credit score will not happen overnight. Realize that it took you several years to get into the position of having a low credit score; it will probably take you several years to work your way out. As long as you're willing to exercise some self-discipline you can do it. And whatever you do, don't ever brush off the advice of those who have experience. We can all learn a thing or two about using credit properly from those who have a proven track record of doing so.