It can determine what kind of interest rates you get when you take out loans, or if you are eligible for a loan at all. It can also affect your employment, your housing situation and myriad other things.
Having good credit means all this will come easier than if your credit is low.
However, according to findings from the 2015 Assets and Opportunity Scorecard, the majority of Americans face the burden of poor credit. Subprime credit scores plague 56 percent of U.S. citizens.
A low credit score signals to lenders, landlords and others that your bill-paying and money managing habits might not be up to par. This is why it’s important to know what your credit score is and, if you find it’s low, to work to improve it.
Improving your low credit score will take time. Some discrepancies stay on your credit report for up to seven years. In the case of bankruptcies, it could take as long as a decade to see this credit-harming instance disappear, according to Equifax.
However, it’s best to start as soon as possible, even if you still have a few years before late payments, judgments or bankruptcies are cleared from your report.
Check For Mistakes
The place to start is looking for errors on your credit report. Carrying a low score for a mistake you didn’t make will definitely hurt your chances for a good loan rate.
According to the Federal Trade Commission, some people choose to hire a company to investigate information that looks incomplete or just untrue. If you don’t want to go to those lengths, you should still contact the credit bureau you got the report from and point out the mistake. It should be taken off as soon as possible, before it hurts your chances at something important.
If something is still on your report even after it should have been taken off, the credit reporting agency or the organization from which the information came should have corrected it. It doesn’t cost anything to you to request that it be looked into and removed.
What Affects Your Low Credit Score?
If there aren’t any mistakes on your report and your low credit score is caused by an error you made, there is still hope. You can’t take back your past discrepancies, but you can begin adopting good habits to slowly start improving your score. The sooner you do this, the better.
According to MyFICO, there are 5 different things your credit score is composed of, each with different weights:
- New Credit – 10%
- Credit Mix – 10%
- Length of Credit History – 15%
- Amounts Owed – 30%
- Payment History – 35%
Since payment history is the most important factor in determining your score, it’s best to focus on this first to start bringing your score up.
Fixing Bad Payment History
Your past late payments can’t be changed, but you can start making payments on time now.
First, determine why your payments were late.
Did you forget which day they were due? If so, check to see if you can set up automatic payments. Many companies have this option and it is a great way to ensure they will never be late again. Instead of manually scheduling the payment or sending in a check, money will be drawn out of a designated account that you choose. The only thing you need to be aware of is your balance in the account. If you don’t have enough money for the bill, it could cause another late payment or an overdraft fee.
One way to combat this is to calculate how much you will need to pay each month for each of your bills.
Next, open a new checking account for these payments. Then, set up a direct deposit schedule to put the amount of money you need each month into that account. Don’t use the account for anything else, except the predetermined bills and payments that will be coming out of it.
If you have a history of late payments because your bills’ deadlines are too close together and gathering enough funds to pay them all at once isn’t realistic, call a few of them to try to change their due dates. According to Credit.com, this is easier than you might think. Many companies sending out bills will make accommodations for you if it means you’ll be able to manage your payments better.
When you stagger your bills, though, keep in mind most won’t want to reschedule things to the 29th, 30th or 31st of a month, because shorter months don’t always have these dates.
Paying Back Amounts Owed
The second most important piece of the low credit score pie is the amount of money you currently owe.
If you are in debt, like many Americans are, it’s important that you are paying them off responsibly. Always pay at least the minimum balance on amounts due, but more if you can afford it.
Create a payment plan to pay down your debts as soon as possible. Then, be sure not to create more. This might be hard if your debt was primarily from credit cards you used regularly.
However, MyFICO explained closing credit cards you already have won’t improve your score. Rather, be sure to only use them sparingly or in emergencies. If you have to, put them out of reach so you aren’t tempted to use them.
Improving your low credit score will take some time and involve some changed habits. The sooner you start, the better. In a few years, you will see your score – and your ability to get a good loan rate – improve.
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