You know that your three-digit credit score is terrible. And this makes it difficult to qualify for car loans, a mortgage or credit cards. Even if you qualify, you are hit with high interest rates.
However, you can rebuild your credit score. It only takes time. Pay your bills on time every month. Pay off credit card debt as possible. Eventually, your score will increase.
Just avoid these five common mistakes that consumers usually make when rebuilding their credit .
1. Paying a credit card is a reason to celebrate. Just do not cancel that card once you have reached a zero balance. If you do, your credit score will suffer. This is due to something called your credit utilization ratio. Basically, your credit score will be reduced if you use too much of your available credit.
Here is an example.
- Let’s say you have $ 10,000 of credit card debt and three open credit card accounts with a total available credit limit of $ 15,000. This gives you a credit utilization rate of 67%.
- If you pay one of the cards and reduce your debt to $ 7,000, your credit utilization rate drops to 47%. This will increase your credit score.
- However, if you close that credit card account and lose that available credit (let’s say it was $ 5,000), your total available credit will go down to $ 10,000 and your credit utilization rate will jump to 70%, even higher than when you had $ 10k of debt. But three open accounts.
- The best movement? Keep the card open, just make sure to avoid raising your balance again.
2. When you are rebuilding your credit score, your most important job is to make your monthly payments on time each month. Late or lost payments can send your credit score dropping by 100 points. These financial errors will remain on your credit report for seven years, too.
So do not forget to send in that car or credit card payment on time. What if you miss the expiration date? Send your payment as quickly as possible. Lenders will not report a missed payment to the three national credit bureaus until 30 days or more after the due date. So even if you missed the official due date, you can still save your credit score.
3. It is tempting when you are trying to rebuild your credit to swear credit cards completely. After all, it is often credit card debt that has reached consumers in credit score problems. But using a responsible credit card is actually a way to help improve a credit score. Your score will increase if you pay your credit card bill on time each month. Not using credit cards at all can really damage your score.
The key, however, is to never charge more than you can afford to pay in full each month. If you charge too much, it will simply increase the amount of credit card debt that you carry from month to month. This will increase your credit utilization ratio, thus hurting your score. So use your card. Do not just use it so much that you have to carry a balance.
4. If you find that you are having trouble getting approved for a credit card because of your bad credit, look for secured credit cards that often do not require a credit check.
Rebuilding a weak credit score takes time and a lot. It can take a year or more to make payments on time and reduce your credit card debt to improve your score enough to make a good risk in the eyes of the lenders. Do not make the mistake of trying to hasten this process.
5. The three national credit agencies of TransUnion, Equifax and Experian maintain a credit report on you. These reports list all credit accounts opened in your name and any payments lost or overdue in the last seven years. They also list negative judgments such as foreclosures and bankruptcies in the last seven to 10 years.
You are entitled to a free copy of each of these reports annually from AnnualCreditReport.com . When rebuilding your credit, it is important to request these reports and study them. Look for errors. A report could say that a car payment was lost last year that you know you paid on time. Correcting that mistake could provide an immediate boost to your credit score.