You read the first part of my two-part series regarding Improving your credit score. As promised, in this second part I am going to explain to you a few key financial principles that will help you recover the financial stability and good credit score that you worried were gone forever.
Generally, the closer your FICO score gets to 800, the more likely you are to get great rates and terms on a VA home loan or other lending options. Those with the highest FICO scores follow the tried and tested principles I am covering here.
The First Principle
Pay your debts on time. Period. A history of no commitment to paying debts according to the stipulations of the lender is one of the surest and fastest ways to drain your credit score. Your payment history accounts for 35 percent of your credit score. Late payments can decrease your total score by as much as 110 points.
You may not realize it, but when you pay an old debt, the negative credit listing doesn’t disappear. A paid debt may appear on your credit report as a paid delinquency, charge off, or collection (whatever the case may be). And the label applied to a paid debt might continue to be a drain on your credit score and yell the wrong thing to anyone who you approach for new credit.
If your goal is to repair your credit, merely paying off your debts won’t get you there. You need to work to restore your credit at the same time. And always, a clean slate of paying your debts in a timely manner will help prevent future problems with your credit report.
The Second Principle
Be careful with new credit. It’s not just older credit accounts that get all the attention. High-scoring consumers also know how to use new credit accounts responsibly. Responding to every credit card offer is not going to help your score. In fact, it’s going to hurt your credit profile. Opening numerous credit accounts or having numerous companies pull your score in a short period can be a red flag for FICO’s scoring formula.
The Third Principle
Keep balances in check. DO NOT max out your credit cards. Keep their balances to 30 percent or less of their credit limit. Pay down balances and keep a closer watch on your spending. Just to be clear, having a balance in and of itself isn’t necessarily a major problem. FICO’s analysis shows those with the highest credit scores had an average of four cards with balances.
The Fourth Principle
Build Your Credit History. Younger borrowers may have a hard time with this one. The length of your credit history accounts for 15 percent of your score. On average, those with good credit have been building a credit profile for 10+ years. Going way back, the company found that consumers opened their first credit account, on average, 25 years ago.
The second part of this building a credit history is to dedicate yourself to saving a portion of your take home pay. Nothing can create security like a buffer. Having money in the bank—and having it in a liquid form that you can get two in the case of a true financial emergency—can save your bacon when it comes to keeping you from overextending yourself with credit.
The Fifth Principle
Nobody is Perfect. The best of people make mistakes, financial and otherwise. Unfortunately, some mistakes gravitate to the credit report. FICO found that 1 in 100 consumers had a collection on their credit report. Understand that credit scores are fluid. One missed payment or one collection should encourage you to work even harder to keep balances low and pay bills on time. Don’t let a mistake become a pattern. You can take the right action to raise your credit score, just as surely as an action (or inaction) led to your score’s original decline.
Hey, you can do this! Start now and get things going in the right direction. Staying positive and taking action will build the momentum you need to restore your good credit rating.
Read Part I here