There are many reasons why an individual can have a bad credit rating. Common reasons include a loss of employment, medical bills, and divorce. Whatever the reasons are in your life, if you have gone through a period of time that has left you with a bad credit rating, there are several things you can do to begin to build your credit rating back up.
First, understand the major factors used to calculate credit ratings
Although there are different ways a lender will calculate a credit score, the basic credit score that people use is called a FICO score, and this is developed from four criteria. One is payment history. This is followed by your credit to debt ratio, and the final two are the length of your credit history as well as the type of credit you have. In order to build up a better credit rating, you will need to address issues that relate to these four factors.
Look at your credit report
The first thing you need to do is look at your credit report. There is really nothing stopping you from doing this because you can get a Free Credit Report. Once you get your report, you need to sit down and look at it carefully. There are, however, three credit agencies: Equifax, Experian and TransUnion. It is possible that your credit report could be different from one agency to the other. This is because not every lender reports to all three agencies, but even when they show differences, overall, they will be close to each other.
The first thing you want to do when you look at your credit report is to look for mistakes. These are negative marks on your credit that have nothing to do with you. Perhaps a lender reported a late payment on an account that was not yours by mistake. Or perhaps there is a mark on your credit from a lender you have never done business with. In either case, you can petition the credit agency to remove it. You will need to demonstrate that it was a mistake; otherwise, they will not remove the negative mark.
Eliminate negative marks on your credit that are legitimate
Other than a mistake, only the lender can remove a negative mark. If the negative mark is old enough, you may be able to have the lender remove it for you. A request, in writing, it usually the most effective way to do this. Any negative marks on your report that are removed, will increase your credit rating. Over time, all negative marks will drop off on their own. Even a bankruptcy will not be listed after 10 years from the discharge date.
Pay your bills on time
This is one of the most important aspects of your credit rating, and along with the total amount of debt that you owe, it is the most important factor. Pay your credit cards and loans on time, and your credit rating will go up. If you have had trouble paying your bills on time in the past, you need to find out why. Without on time payments, your credit rating will always suffer. Perhaps you are taking on too much debt, living above your means, or you simply lack discipline. Whatever the case may be, you need to fix this problem before moving forward in an attempt to rebuild up your credit.
Keep your debt utilization ratio low
This ratio is as important as being on time with your payments. This ratio is simply how much credit you have versus how much you owe. You want this ratio to be as high as possible. Ideally, you should keep your credit balances at zero, but this is not always possible, but the idea is to keep your balance on revolving credit as low as possible. If you owe a lot of money, along with making your payments on time, you can begin to pay down your debt. This will make your credit rating go up. Paying off debt is one of the fastest ways to increase your credit rating.
The element of time
Keep in mind that it takes time to build up your credit, so you need to be patience. One reason that it takes time is that the length of time you have had credit is an element of your credit score. This includes the length of time you have had particular accounts open. Your rating is penalized if you have several new accounts.
Eliminate small balances
Although owing a low of money, relative to the total amount of credit you have, can hurt your rating, so too can several accounts with small balances. If you have several accounts with an outstanding balance, then pay them off as soon as possible. For many consumers, this is common with credit cards, so if you have several credit cards with small balances, try to use only one or two and keep the others at a zero balance. This will help your credit rating as well.
With the ideas listed above and a healthy amount of patience, you will be able to build up your credit rating, regardless of how low it is today.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.