Credit Coaching Guide – Part 2
Experts say the average time required to rebuild one’s credit to the point at which you can be accepted for a major credit card or small loan is approximately two years.
Here are some other things to consider when trying to repair your credit:
- Pay down your credit cards. Paying off your installment loans (mortgage, auto, student, etc.) can help, but typically not as dramatically as paying down — or paying off — revolving accounts like credit cards.
The credit-scoring formulas like to see a nice, big gap between the amount of credit you’re using and your available credit limits. Getting your balances below 19% – 25% of the credit limit on each card can really help.
While most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits.
- Use your cards lightly. Racking up big balances can hurt your score, regardless of whether you pay your bill in full each month.
What’s typically reported to the credit bureaus, and thus calculated into your score, is the balance reported on your last statement. That doesn’t mean paying off your balances each month isn’t financially smart — it is — just that the credit score doesn’t care.
You typically can increase your score by limiting your charges to 19% – 25% or less of a card’s limit. If you’re having trouble keeping track, consider using a check register to track your spending, logging into your account frequently at the issuer’s Web site, or using an app to track your spending. Mint is a popular app for tracking your spending. Below is a link to a list of other apps used to track your spending.
Check your limits
Your score might be artificially depressed if your lender is showing a lower limit than you’ve actually got. Most credit-card issuers will quickly update this information if you ask.
If your issuer makes it a policy not to report consumers’ limits, however — as is the usual case with American Express cards and possibly even those issued by Capital One — the bureaus typically use your highest balance as a proxy for your credit limit.
You may see the problem here: If you consistently charge the same amount each month — say $2,000 to $2,500 — it may look to the credit-scoring formula like you’re regularly maxing out that card.
You could go on a wild spending spree to raise the limit, but a more sober solution would simply be to pay your balance down or off before your statement period closes.
Check your last statement to see which day of the month that typically is, then go to the issuer’s Web site about a week in advance of closing and pay off what you owe. It won’t raise your reported limit, but it will widen the gap between that limit and your closing balance, which should boost your score.
Dust off an old card. The older your credit history, the better. But if you stop using your oldest cards, the issuers may stop updating those accounts at the credit bureaus. The accounts will still appear, but they won’t be given as much weight in the credit-scoring formula as your active accounts. That’s why many financial companies recommend to their clients that they use their oldest cards every few months to charge a small amount, paying it off to almost zero when the statement arrives. Leave a $5 to $10 balance on all of your credit cards, this will help to always show recent activity on your card.
Get some goodwill. If you’ve been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a “goodwill adjustment” improve the better your record with the company (and the better your credit in general). But it can’t hurt to ask.
A longer-term solution for more-troubled accounts is to ask that they be “re-aged.” If the account is still open, the lender might erase previous delinquencies if you make a series of 12 or so on-time payments.
Check your credit score
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