Do you have middling or poor credit and need help rebuilding it? Sow the seeds of good credit by understanding the credit cycle and use your knowledge to improve your own credit score.
When you begin building a credit score, you have zero credit. But by opening a savings account, you can begin building your credit from scratch. With this newfound credit, you will find it easier to get a job, get an apartment, or get loans and credit cards.
What are the numbers that divide the good credit scores from the bad?
- 620 is the magic number–the dividing line between good and bad credit.
- 723 is the average national credit score.
- 740 is the magic FICO number for good credit.
- 760 is the dividing line for excellent credit.
- 675-719 is merely a mediocre credit score.
- 620-674 is a below average credit score.
- Below 500 is simply awful credit.
Usually you can begin to build your credit by obtaining a credit card. Keep your credit use to around 30% of your credit limit to get the best score. It’s not a good idea to max out your credit card, and it’s always best to pay in full at the end of each month. It’s tempting to pay only the minimum payment, but this may leave a mark on your credit report and can increase your bill with interest.
When you take out your first loan, having someone co-sign for your loan is helpful, and may qualify you for loans you may otherwise not be approved for. Pay attention to interest rates; those with lower or less established credit scores are more likely to get stuck with a higher one. Having a co-signer can prevent this.
Once you are ready to sign for a mortgage, pay attention to your overall credit score. To obtain the best credit scores, you need a mix of different types of credit, including revolving accounts (credit cards, lines of credit) and installment accounts (auto loans, personal loans, mortgages).
To continue building good credit, it’s essential that you pay all your bills on time, all the time. All it takes is a single missed payment to trash your credit scores. Every late payment hurts your score, and it can take seven years for one black mark to disappear. Making an installment payment is better than making none at all.
Falling behind can really take its toll on your credit score. Timeliness of payment makes up about 15%of your credit score. It’s never good to max out your card, especially if you can’t pay it in full at the end of each month. Under US law, prospective employers are allowed to look at your credit report in order to decide whether or not to hire you for a position.
If you do fall behind, tell your creditors if you need to make a late payment and request for it not to be reported as late. If you give advance notice, most creditors will be willing to extend up to 30 days and not consider it as late payment. Never ignore or run away from your creditors–it will only hurt your score.
If you do hit bottom, know that bad credit can prevent you from being granted further credit; interest rates on credit cards, loans, and mortgages will all be much higher for someone with poor credit. Additionally, second-rate credit cards with high interest rates or which require a deposit sometimes fail to report payments made on time–hindering credit improvement.
To start the recovery, paying bills on time is the first essential step. There are a number of ways to help improve bad credit. High yield savings are another great place to start–these accounts have higher interest rates than others and help improve credit. Secured credit cards also help–they require you to deposit money as a security measure, but watch out for those with monumental fees or interest rates.
When your credit is awful, beware–scammers will come calling. Watch out for credit repair scams! Never pay a large fee to a credit repair agency–it usually doesn’t work. YOU are the only one who can improve your credit. Instead of these programs, seek credit counseling and work to build a budgeted bill-paying routine.
You might think one way to ease the strain of rebuilding credit is through settlements and paybacks. Settlements are a lender’s way of cutting their losses when they think payments are doubtful. They let you pay off the loan easier by accepting an amount less than you owe. Although this may seem like a win and may stop further deterioration of credit score by allowing unpaid bills to pile up, it is not a positive action and will appear as a negative mark on your credit report.
Once you begin building back good credit, it will take seven years for the negative marks on your credit score to disappear but keeping up with your payments in a timely manner will show improvements after only 6-12 months. Then, loans and credit cards can be obtained at normal credit rates without having to pay monumental fees or make large deposits to earn them.