Is your credit down on the mat for the count? Having a good credit score is a very important component to personal finance. Having a low credit score can cost you thousands of extra dollars in loan repayments for things such as:
- car loans
- home loans
- other personal loans
Read on to learn about these top 5 tips to repair your credit score:
Understand How Your Credit Score is Calculated
The first step to improving your credit score is to understand how your credit score is calculated. There are a couple of main factors that you need to be aware of:
- 35% – Payment history: This is if you are paying your minimum payments on time each month.
- 30% – Credit Utilization: This is how much of your total credit you are using. For example, if you have 4 credit cards with a $5,000 limit on each one, then your total available credit is $20,000. If you have $15,000 in credit card bills, then your credit utilization is 75% ($15,000 / $20,000). A lower percentage is better here as it means you have a larger cushion.
- 15% – Length of Credit History: This is how long you have had each credit account (loan, credit card, etc.).
- 10% – New Credit: Your credit score can be penalized here if you have opened too many new credit accounts. The thinking is that if someone is opening a bunch of new accounts, they may have financial problems that will shortly surface.
- 10% – Credit Mix: You are penalized if you only have one type of credit (such as credit cards). Data show that consumers with multiple forms of credit (credit cards, loans, etc.) are more likely to pay their bills in-full and on-time.
So How do I Repair My Credit Score?
If you understand each of the above, you can work in each category to begin to repair your credit score over time. You really have two options here:
- try to repair your credit on your own
- find credit repair services that can assist you
Rebuilding your credit is pretty straightforward, but it can be a lengthy process. For those that are impatient or are not interested in getting into the details, it is usually better to just pay for a credit rebuild service and move on.
If you are interested in fixing your credit yourself, then read on. Let’s focus on each category and throw you a couple of tips to employ to repair your credit score:
The easiest way to repair your credit score in this category is to find a way to pay at least the minimum of every bill. If you do not do this, you may pay one balance down faster, but your credit score will be annihilated.
Credit Tip: Be sure you are paying at least the minimum payment for each and every bill.
The easiest way to repair your credit score in this category is to keep any lines of credit open. This means don’t cancel any credit cards once they are paid off. Keep the account open and charge something small to it every once in a while. This will help you to keep your credit utilization low which will help repair your credit score.
Credit Tip: Don’t close out paid off credit card accounts.
This tip goes along with the one you just read. If you can have a couple credit cards that you have had for 10+ years, then you need to hold onto them. Your score improves with time as you keep accounts open in good standing.
Credit Tip: Keep your credit card accounts open even if you are not using them.
This one is pretty self-explanatory if you are trying to repair your credit. You should hesitate from opening new credit accounts or taking out new loans if your credit score is in trouble and you can avoid asking for more money. It is much better to repair your credit score first, then take out more money if necessary.
Credit Tip: Avoid opening new credit accounts if you can.
Over time, you need to develop a healthy mix of credit. This includes loans, credit cards, etc. This is kind of like the icing on the cake when you get everything else fixed with you credit. Once your credit score is in a decent place, it can be a good idea to take out loans you may not necessarily need (such as an auto loan for a used car) just to help build up your credit score and credit history.
Credit Tip: Work on your credit mix once you have repaired your credit score in other areas.
How to Repair Your Credit Score – Final Thoughts
It can be easy to get yourself into credit score trouble. If you find that your credit score is not where you’d like it, there are steps you can take to repair your credit score. The 5 tips above are a great way to begin building your credit score back up if it has taken a hit.