HOW TO REBUILD YOUR CREDITNov 13rd, 2020
Make your payments!
Making your payments is the single most important factor that makes up your credit score. If you can stay on top of your payments, the rest should fall into place.
- Make all of your payments on time
- If you cannot pay the balance off, make sure you pay at least the minimum payment before the due date
- If you think you are going to miss a payment, reach out to the lender before the payment has been missed. In this case, it is much better to ask for permission then to beg for forgiveness.
- Even if you are disputing a bill, make the payment on time. The credit bureau will not be aware you are in a dispute, and it will not be noted on your credit report. Proceed as usual by paying on time and wait for the dispute to be resolved. Once the dispute is resolved in your favour, it is more than likely you will be credited back the funds in question. If it is not resolved in your favour, then good thing you made your payments on time!
Use your credit responsibly!
It is especially important to use your credit responsibly and not overextend yourself. Whatever the limit is on an account, that is the limit you and the lender agreed on, and it should not be exceeded. If you do end up going above this limit, it will immediately, and negatively, affect your credit score. The exact percentage that lenders like to see a consumer using varies, but the range is between 35% and 65% of your total limit. For example
- $500 credit card limit – The maximum you would want to be using of that $500 is between $175 (35% - low end) -$325 (65% - high end)
The reason lenders prefer to see you under these thresholds is because if you use most or all of your available credit, you’re seen as a greater risk, even if you pay your balance in full before the due date. What this shows the lender is that you do not have a good enough handle on your finances and that you need to overextend yourself.
You can calculate your credit usage rate very easily to make sure you are under these limits on each individual card as well as all combined:
- Add up all of the balances for each trade line.
- Add up all of your credit limits for each trade line (Credit Cards, Lines of Credit, Loans)
- Take the number of all your trade line balances and divide it by the total credit limit you have. Example:
- You have a $500 Credit Card, $10000 loan, $10000 Line of Credit. These are the credit limits.
- You owe $300 on the Credit Card, $7500 on the loan, and $1000 on the line of credit. This is the balance owing.
- $300 + $7500 + $1000 = $8800 is the balance of these accounts.
- $500 + $10000 + $10000 = $20500 is the credit limit of these accounts
- $8800 (balance) / $20500 (limit) = .0429 x 100 = 42.9% credit utilization.
In this case we are a little above the low end of where lenders would like to see your credit utilization, but not above the high end, so you wouldn’t be considered overly risky to the lender based on credit utilization. Lenders will look at the type of loan as well to determine whether it should have a high amount or not. Being near the credit limit on a credit card is not the same as being near the credit limit on an auto loan, because these are different types of loans. A credit card is “revolving” payment, where as an auto loan is an “installment” payment. Installment loans have a set starting amount and a specific amount of payments until the loan is paid in full. A revolving account, like a credit card or line of credit, allow you to control how much is owing each month. If you owe more, the minimum payment will increase, so it is especially important to make sure you are paying at least the new minimum amount each month.
You want a lengthy credit history!
The longer one of your accounts is open, the better it will impact your score. There is a big difference in the lenders eyes when they look at a tradeline that is under one year old versus looking at one that has been around for much longer. It is much easier to determine whether the lender can trust that they will be paid back if there is evidence the customer has not missed a payment in years compared to only a few months.
Account transfers will affect your credit because you are closing one loan in order to open a different one with different terms, like lower fees or a lower interest rate. What this does is closes the existing account and starts a fresh tradeline, possibly lowering your credit score depending on what other existing credit you have.
If you have old credit and are thinking about closing the account, you may want to consider keeping it open in order to keep the age of your accounts high, keeping your score higher at the same time.
Only apply when necessary!
Lenders expect you to apply for credit from time to time. This is a necessary part of how the system works. When a lender views your credit report, this is called an “inquiry”. This is the same thing as a “credit check”, and each time credit is pulled, you are deducted points from your credit score.
Additionally, when there are too many credit checks in your credit report, lenders tend to think you are either urgently seeking credit, or trying to live beyond your means, which are both negatives in the lender’s eyes.
Controlling the number of credit checks:
The good news is that you are in control of the amount of credit checks that appear on your credit bureau. You can achieve this by limiting the number of times you apply for credit. Only apply for credit when you only really need it, and when you do apply, make sure that you apply everywhere that you intend to within a 2-week period when shopping around. This will be recognized as a “buying cycle” and will be combined and treated as a single inquiry for your credit score.
The difference between a “Hard Pull” and a “Soft Pull”:
A “hard pull” is a credit check that will appear in your report, as well as deduct from your score. Anyone who looks at your credit report will be able to see where you have applied within the last couple years. The types of applications that would count as a hard pull are:
- Applying for a new credit (loan, credit card, line of credit)
- Some rental applications
- Some employment applications
“Soft pulls” are a credit check that appear in your report, but only you are able to see them. They also have no effect on your credit score. The type of credit checks that will have a soft pull are:
- Requesting to view your own credit report
- Businesses viewing your credit report to update their records for an existing account
Use different types of credit!
Not all credit is the same. If you only have one type of credit, like a credit card for instance, this means you only have a revolving type of loan. Lenders prefer to see a variety of types of credit as it tells a better story of what type of customer you are. There is a very large difference between having a $500 credit card that the minimum payment is $10 a month, or committing to a new car loan, which might be $400 a month. It is hard for a lender to agree to loan you a substantial amount of money if the only history is you having to make a $10 payment. Additionally, having a history of installment payments will show the lender that you are able to make the same payment, on time, each month, further allowing them the confidence that you will pay the debt, and allow them to lend you the money in the first place.