How to Get a Good Credit Rating
Your credit history is a record of any credit you’ve ever had or applied for. For example, car loans, business loans, educational loans and personal loans are all recorded in a credit report as part of your credit history.
One of the reasons why it’s important to have a credit history, is because without one, banks or other financial institutions may be reluctant to lend you money because they will have no idea whether you will be able to pay back the money you borrow.
It used to be the case that banks would lend you money because they knew you or your family personally. But now, things are a lot different, as banks are run more like a business whose aim is to maximize profits and minimize losses.
One of the ways that they do this is by checking your credit history when you apply for a loan.
What Does a Credit Report Contain?
When you first apply for a credit card, a lot of your personal information is used to create a credit report. This report will then be used to record your financial history throughout your entire life, such as any more credit cards you apply for or any loans you take out.
Depending on what country you live in, banks, credit card suppliers, department stores, and finance companies, may pass all of your financial information on to nationwide credit agency companies who then store it on a computer as a record of your financial activities and history.
Some of the information that is recorded in this report includes:
• Social security number
• Date of birth
• Home address
• Employment history
• Records of arrest
• Court appearances
• Income status
• Bill payments
• Loan applications
• Repayment of debt
All of this information is used to calculate your creditworthiness, which is just a fancy way of saying how risky it is to lend you money.
If you apply for a loan, your report will then be checked with a credit agency who will then provide all your financial information to the person whom you are asking for a loan.
Based on the information contained in this report, your request for a loan will then either be approved or declined. In addition to this, all the information which you have submitted as part of your loan request can, and usually is, recorded for future reference.
Who Can See Your Credit Report?
As you have just seen, your credit report contains a lot of personal information that has been recorded throughout your entire life.
Fortunately, however, not everyone can access your credit report as there are only certain circumstances under which it’s allowed to be seen:
• When you request to see it.
• In response to a court order.
• Anyone who has received your written permission.
• To anyone who you are asking for credit.
• To anyone who will use the report for insurance purposes.
• By your government to determine eligibility for benefits.
• A landlord when you rent a property.
• Certain business transactions.
When it comes to your credit report, just keep in mind that anytime you need to borrow money your credit history can be accessed, which is why it’s important to keep it as clean as possible.
A bad credit history can not only make it more difficult for you to get a loan, but it could even prevent you from getting certain types of jobs, such as those in defense, banking, or a medical related field.
How to View Your Report
The first step to having a clean credit report is to look at your credit history. Most financial experts recommend you do this at least once a year, or before you apply for a loan as this is when your report will be checked.
To view your credit report, you can contact your agency directly or request a free annual report by visiting Annual Credit Report.com. You are also eligible for a free copy of your report if you request one after being denied a loan or mortgage application.
Understanding Your Credit Score
One of the first things you will be interested in when viewing your credit report is your personal credit rating, which is also known as a credit score or Fair Isaac Corporation (FICO) score. This score reveals to potential creditors your current level of creditworthiness.
The worse your score is, the worse your creditworthiness will be, and so the harder it will be for you to get a loan. If you do manage to get a loan with a poor credit rating, then that money will be lent to you at a higher rate of interest than if you had a better rating.
This is why it’s important to have a good credit rating, because with a poor rating not only will you struggle to get a loan, but you will also have to pay back much more on any loan you get.
What do the Ratings Mean?
Credit ratings can appear in two forms. The first, which most people are familiar with, involves rating your creditworthiness on a numerical scale from 300 to 850, with 850 being the best score.
Most people, as shown in the graph below, have a rating of 700-799. This is considered to be a good score, and so it shouldn’t present you with any problems if you ever need to apply for finance.
Another way that ratings can appear is on an alpha numeric scale. This can range from 0-9 and is preceded by the letter “I” for credit that is paid in installments, such as a home mortgage, or “R” for continuous or revolving credit, such as a credit card.
R1-R4 and I1-I4 are considered to be the best ratings to have, and R7-R9 and I7-I9 the worst.
How is Your Credit Score Calculated?
Your credit score is calculated based on your overall financial history. The most important factors which are used for this calculation are:
1) Past Experience With Credit
This includes how well you have handled money that you received on credit. For example, did you pay off your debt in full? How long did it take you to repay your debt?
What was the size of your debt? The better your past performance with credit the better your credit score is likely to be.
2) Level of Debt
Your current level of debt, or level of indebtedness, can affect your credit rating. In general, a high level of indebtedness will lower your score, whilst a low-level of indebtedness will raise it.
3) Duration of Credit
Credit scores tend to be higher with people who have been in credit for a longer rather than shorter period of time, and have been able to manage their money well during this period.
Think of this section as your financial track record. The longer a period of time that your record spans, the more it is seen as being representative of how well you are able to manage your money.
4) Types of Credit
This section relates to the types of credit you have taken out. For example, this could involve loans for your home, car, education or personal loans in addition to credit cards and a bank overdraft.
Better ratings tend to result from using multiple lines of credit (e.g., mortgage & car loan) rather than just one line of credit (e.g., car loan), providing that the money you borrowed was managed well.
5) New Credit
You may experience a lower rating if you frequently apply for or inquire about new credit. Remember, information submitted during a loan request will usually be recorded.
Whilst your actual credit score is based upon the five factors that we have just mentioned, lenders will usually look at other factors in addition to your score to calculate your creditworthiness.
Typically, this will include your current employment status, level of income and assets, in addition to the type and amount of credit that you are seeking.
Some other factors that may be taken into consideration include:
If you are of working age between 24 to 64, you will score one point. If you are below or above this age you will score zero.
If you are married, then you may have a chance of adding an extra point to your score. If you are not married, or do not have any dependents, you will score zero.
From a creditor’s perspective, a single person with no family ties can easily pack up, leave town and not repay their loan. So they are naturally considered to be a higher risk.
Creditors are interested in your current living arrangement. If, for example, you currently own a home with a mortgage or even without a mortgage, you will score more points than if you did not own a home.
Another important factor is how long you have lived in your current residence. The longer the better. So if you move around regularly, you will be considered a higher risk.
Checking For Errors
You should periodically review your credit report to check for any errors that it may contain.
Since your credit history is updated by people who have entered your information into a computer, errors are sometimes made which could one day cause your application for a loan to be rejected.
To avoid this happening, you should get a copy of your report before you apply for any sort of loan and then check it thoroughly for errors.
If you discover a mistake, you have a legal right to write to your credit agency and dispute what your report contains.
Ideally, you should check your report once a year. But if you make lots of financial transactions throughout, then once every six months may be more appropriate.
What to Look Out For
When you first get a copy of your personal credit report, the first thing you should do is to determine the status of your credit rating.
This should give you a good general indication as to whether or not there are any errors. For example, if you have a bad rating when you were expecting a good rating, then this could be a sign of errors in the report.
However, it is important to note that all of your financial history may not be contained in one file from one firm. So if you can, get another copy of your credit report from another firm to verify its accuracy.
Things that you should be looking for and checking include your full name, social security number, current and previous addresses, spouse’s name and date of birth.
Other things to look out for are account numbers, dates you opened/closed any accounts, your credit limit, highest amount of credit used, merchant’s names, and your repayment history.
All of this information should be correct because it is how you are identified, so if any of that information is wrong, your credit report is likely to contain inaccuracies which could adversely affect your score.
If you notice any errors in your recorded financial history, take a note of those errors and write them out in the way you think they should be listed.
You will find a space on the right hand side of your credit report in which you can use to protest an item that you think is incorrect.
To support your claim, you should attach any evidence that you have which backs up your belief that something has been entered incorrectly.
This information will then be used to further investigate your claim, and will thus increase the likelihood of incorrect information being amended.
Contacting Your Agency
There is a limit of around 100 words on the letter that you can send to your credit agency. For this reason, you must make sure that you state your point clearly and concisely whilst also asking them to investigate.
When you are ready to send your dispute letter, do so by registered mail so that you will have proof of the date that it was received.
If your credit agency does not reply within 60 days, send another letter informing them that they are required by law to investigate and correct the mistakes contained in your report.
Alternatively, you can ask for your credit report to be updated and have the incorrect information removed.
What you cannot request is for information which you don’t like to be removed. This should, however, be removed automatically after 10 years.
So even if you do have something bad on your credit report, you shouldn’t have to worry about it staying there your whole life.
Still Denied Money After a Credit Check?
Unfortunately, correcting errors in your credit report does not always result in your normal line of credit being automatically restored, and so you may still find that some stores or financial institutions deny you credit.
This may occur for several reasons, although the most common is that there are still errors in your report which you previously failed to identify.
The good news, is that if you are denied credit you have a right to know why. You can then investigate by requesting a copy of your report from the agency who have marked you down as having bad credit.
This should subsequently make it a lot easier for you to identify the reason why you have been denied credit, and providing that you have evidence to the contrary, a lot easier to fix.
What Can Lower Your Score?
Fortunately, negative information on your credit report does not stay on your report permanently. This is done so that you don’t end up paying for mistakes your whole life which you made when you were younger.
Below you will find listed some of the factors that can lower your credit score, and how long you can expect each to remain as part of your credit history:
If you pay money towards your debt 30 to 180 days after it was due, this will be considered a delinquent payment and remains on your report for seven years.
A collection account occurs when you fail to pay a bill for three to six months, and a credit collector was then called in to collect the money from you. This will remain as part of your credit history for 7 years.
These will remain on your report for seven years from the date of the initial missed payment that led to the charge off.
Closed accounts will remain on your report for seven years, regardless of whether they were closed by you or a creditor.
Lost credit cards
If you lose your credit card and then call your bank for a new card, they will close the account associated with that card.
Providing that there are no delinquencies, the account will appear on your report for two years from the date you reported your card as lost.
If there are delinquencies, the account will appear on your report for a further seven years.
Child support judgments
These will remain for seven years on your report.
Civil & small claim judgments
These will remain for seven years on your report.
Will remain for a minimum of one year from the date the inquiry was made.
How to Improve Your Credit Score
Credit ratings can naturally fluctuate throughout a person’s life as a result of how well they are able to use and manage their money.
This means that if you wish to improve your current rating, you can do so by acting in a way that will be seen in a favorable light by lenders.
Some of the best things that you can do to improve your credit rating are listed below:
Pay Bills on Time
If you are lent money, repay what you owe in full and on time. Doing so will make future lenders much more confident in lending you money as they will be more certain that they will eventually get it back.
Don’t Ignore Overdue Statements
Overdue statements are not the nicest type of letter to receive, but they should never be ignored.
If you continue to ignore requests for money from creditors who you are currently indebted to, they may try to reclaim their money by repossessing your personal items or list your debt as uncollectible.
If either of these situations happen, it will have a very negative effect on your overall creditworthiness and rating.
As a result, future lenders will likely classify you as a risk high customer, and so either won’t lend you any money at all or will only do so at a very high rate of interest.
Avoid Financing Companies
Try to avoid taking out a loan with a finance company. Such companies give out loans to very high risk customers, and although this may be your only option for getting a loan, doing so is going to hurt your rating even if you repay your loan back in full and on time.
Build up a History
Although it can be desirable to cut up your credit cards in order to stop yourself accumulating more debt, the danger of this from a ratings perspective, is that it can stop you from building up a credit history if you only pay for everything in cash.
However, if you can stop your debt spiraling out of control then this is probably a good thing, as you can always improve your score later on.
But just be aware that in order to improve your credit rating you will need to maintain an active credit history, and so this means that eventually you will need to get into debt.
Debt in itself isn’t bad, and lender’s actually like to see people in debt because it shows them how well they are able to handle it.
So if you are looking to improve your rating, don’t avoid debt entirely, just make sure that you manage it well and pay it back on time.
Use Different Types of Debt
Credit cards aren’t the only way to build up your credit history, and if you rely upon them entirely as a means of building up your history then it could end up working against you.
Lenders like to see people who have different forms of debt, such as car loans or home loans, as this shows them that you are able to manage different types of credit such as revolving repayments (i.e., credit card repayments) and installment repayments (i.e., home mortgage repayments).
Limit New Credit Applications
If you are always applying for new lines of credit then this can work against you. Up to a point, multiple lines of credit from different sources can work in your favor.
But if you are taking on vast amounts of debt, then it could affect your rating because the more debt you take on the more difficult it will become to repay.
The same also applies to the amount of credit that you apply for, as if you apply for a large amount in one go then you may be seen as a person who can’t live without credit which could then adversely affect your score.
Keep Below Your Limits
Try to keep at least 30-35% below the available limits on your cards especially if you plan on taking out a loan shortly. Taking out your full limit shows that you need money, and so may be less likely to repay a subsequent debt due to higher existing levels of debt.
How to Build Credit Without Credit
Eventually, there comes a point in most people’s life when they need to borrow money. They may need money for a new home, a new car or even for a vacation. But when they apply for a loan they get rejected because they have a bad credit score.
When this happens, you need to take steps to improve your score by adding positive credit to your report. But what happens if you can’t get credit? How do you build credit without credit?
Fortunately, it is possible. Below you will find a few ways that will help you to do this:
1) Get Help From a Friend
If you can get a friend to agree to have you as a co-signer on their credit card, you can essentially piggyback on their good rating and use it to help improve your own.
All that needs to be done is for your friend to call their bank, and then request that you be placed on their card as a co-signer. You will then be sent a copy of their card.
Once you have their card, although you can use it, you don’t have to. As long as your friend uses the card and pays back their debts on time, your credit history will gradually start to fill up and your score will improve as a result.
2) Use a Secured Card
A secured credit card involves you putting money into an account before you receive a credit card.
So for example, if you put $400 into your account, then you will be allowed to charge up to $400 on your secured card. Some banks, however, may allow you to exceed this amount by two or three times.
Because you are essentially insuring the money you borrow yourself, your past history tends to be less of a factor when you apply and so you should be able to get a secured card even if you current have a very bad rating.
However, it is important to ensure that your secured card is not listed as a secure card with a credit bureau, and also that it lists your current limit. Otherwise, you could make your rating worse by getting one.
3) Use Store Cards
A frequently overlooked method of building credit is with stores. Some stores, such as clothes or jewelry stores, will give out money on credit quite easily which you can then use to your advantage to build up your history.
But if you do use this method, make sure that the credit these stores offer you reports back to a credit bureaus, as not all of them do.
Also, be warned that store cards usually also have very high interest repayments. So if you can’t afford to repay the money you have borrowed, you could quite easily get yourself into debt.
4) Keep Your Bank Accounts Active
For each account you have, keep a small balance of at least $50 in it so that your account is not in the red.
If you owe any money, make sure that you pay at least the minimum amount each month as this is what loan officers and other creditors will look for to see if you can handle your debts and keep them under control
What Won’t Help
Not all forms of debt will help you to build up your credit score because some are not reported to the credit bureaus. Some of these include:
• Private loans from friends or relatives
• Loans for cars from small car lots
• Utility payments
If you are looking to improve your rating, you should therefore always check if a certain line of credit will be reported to the bureaus before you accept to take it on as a financial debt obligation.
Getting a Loan With Bad Credit
Because you are automatically classified as a high risk individual if you have a bad credit rating, anyone who lends you money is going to want to make sure that they can cover the money they lend in any way possible.
This is necessary because if you don’t pay back the money, then at least they will have something to compensate themselves with.
Usually, this compensation comes in the form of collateral. For example, if you have a bad rating and request a loan, you may be asked for your car, home, valuable jewelry or equipment as collateral before you are granted the loan. This is often referred to as a secured loan.
Although this may not be an ideal situation for you, unfortunately, if you have a bad rating your options are somewhat limited. As unless you have someone who can act as a co-signer on your loan, you are going to have to use your assets to secure a loan.
The good news is that any personal items used as collateral are only used as insurance in case you default on your loan. This means that you will get back ownership of them once you repay the money you borrowed.
In addition to getting your personal items back, if you are successful in paying back your loan in full and on time, your credit rating will improve and the next time you may be able to go directly to a bank to get a loan.
High Interest Rate Loans
Not all financial institutions will ask for collateral, because some people don’t have enough valuable items to cover their loan. In cases such as this, you may be granted a high interest loan.
A high interest loan is commonly given to people with bad credit ratings due to the risk they are considered to be. This type of loan is also called an unsecured loan.
The advantage of having a high interest loan is that it can be relatively easy to get approved for. The disadvantage is the amount of money you are required to pay back, which can end up being two or three times the amount you originally borrowed.
For this reason, high interest rate loans should only be considered as a last resort. You also want to be sure that you only use this money for an emergency, and will be able to pay it back relatively quickly.
If you know that you will be able to pay back the loan quickly, make sure that you ask whether it is possible to pay back your loan all at once or whether you can pay back more than the minimum amount each month.
This is important to know, because some financial institutions only allow you to repay the monthly minimum amount, which means that you end up paying back a lot of extra money.
Been Refused Money?
There is no guarantee that you will receive a loan, whether it be an unsecured loan or a secured loan, if you have a bad credit score. So be aware that your loan application may be denied.
If your loan application is rejected, you may want to try applying again but for a lower amount. This reduces the lenders overall risk and therefore increases their willingness to lend you the money.
If that fails, then it is likely that you have a very bad rating and are considered to be an extremely high risk borrower. The only option for you at this point to restore your rating would be to try to repair your credit and clear out any debts that you currently have.
At this point, a good idea would be to request a copy of your credit history, and see if it is an accurate representation of your financial past.
It may be the case that some information was once entered incorrectly, and that is the reason why people are now refusing to lend you money.
Credit Repair Companies
A credit repair company offers people with a bad credit score debit consolidation loans, debt counselling, or debt reorganization plans, which are designed to help stop the credit collectors from knocking on your door or calling you up on the phone.
However, it’s important to remember that these companies are not helping you because they have a good heart. They are a business, and as such, they make money by helping people like you to repair bad ratings.
For this reason, you need to be very careful who you go with, and don’t just take up the first offer you see.
Do the Research First
As a general rule, you should look at as many different credit repair companies as you can. After looking at all the available options, only then should you select the one which you feel is best for you.
Look for trusted and well-known companies, as even though smaller companies may be able to offer very attractive deals, usually there is a catch which involves you losing out somehow.
A good place to check up on a specific company is with the Better Business Bureau to see if any complaints have been filed against them.
You can also try searching on the internet by putting in the name of the company followed by phrases such as “bad experience” or “avoid”.
If you are successful in finding a good credit repair company then you are likely to experience better customer service, a fair price and proven results. So obviously it’s in your best interest to spend the time to ensure that you get the best.
Below you will find listed some of the specific things that you should be on the lookout for when considering the services of a credit repair company:
1) Track Record
You want to know as much as you can about a company before signing up with them. So ask what they have been able to do for people in the past, and if they can provide any evidence to support their claims.
For example, ask if they have been mentioned in the media, or received any awards for good financial service. It’s also worth knowing how long they have been around, as newer credit repair agencies are likely to be less reliable.
2) The Price You Are Given
Some companies may give you such a rough estimate on price that you have no idea how much it’s going to cost you to use their service.
So if you get an estimate ranging from hundreds to thousands, go find another company who can give you a more accurate estimate.
Although you are unlikely to find out in advance exactly how much a company is going to charge for their service, you should be able to get a reasonable idea before you sign up with them.
3) Past Clients
One of the best and most reliable ways to find a good credit repair company, is to speak with people who have been with the company before and were happy with the service and results that they received.
This can be done by speaking with people who you know in person, or by searching the Internet and looking for comments that people have posted on review sites or forums.
In particular, look for people who have been successful in improving a bad rating and are now able to take out loans when before they were being denied.
Ultimately, the results are what really count, so look for people who have achieved the type of financial results that you hope to obtain.
Can You Afford It?
Although most governments make it clear that nobody can repair your bad credit except you, the number of credit repair companies seems to be increasing exponentially.
Most of these companies will promise to give you a clean slate, and eliminate any bad credit from your report. After that is done, you should then be able to go out and start borrowing money again.
The trouble is, these companies don’t offer their services for free. They are a business just like any other business, and as such, charge a variety of fees such as upfront fees, maintenance fees and monthly fees.
If you are already in debt, these extra costs will get you further into debt, and some people may not have the money their agency is asking for.
Typically, you can expect to pay somewhere in the thousands range for their service, so don’t expect it to come cheap!
Entrusting Your Personal Details
When you sign up with a credit repair company you will be required to share a lot of personal information with them, without this information, they can do little to help you reverse your bad credit score.
This information will include your name, date of birth, social security number, financial details, previous employment, where you live and have lived in the past. Basically, everything that would be needed to commit identity fraud.
Since there is a seemingly endless supply of companies to choose from, with new ones springing up each day, you need to be sure that the company you give your personal information to will use it responsibly and only for what it was intended for.
The importance of this cannot be understated, because many people have been scammed by unscrupulous agencies and ended up getting themselves into a worse financial situation than when they originally began.
Can You do it Yourself?
You don’t actually need a credit repair company to reverse bad credit, as most of what they do you can do by yourself.
For example, in order to get rid of bad credit on your report, an agency will work with you to find any information that has been entered incorrectly.
They will then write letters to credit bureaus, and inform them of the incorrect information. As we discussed earlier, you can already do this by yourself.
During the time while your claim is being investigated, the information in question will be removed temporarily thereby giving you a “clean” report.
The trouble is, if the credit bureau who your agency have written to is able to prove that the information was entered correctly, it will then be added back to your report again.
Remember, only information that has been incorrectly entered can be removed from your credit history, not information that has been entered correctly.
The only exception to this is that certain financial information is removed after a decade, or sometimes longer, so that bad credit doesn’t stay with you for your entire life.
So credit repair agencies can be helpful for some people, especially if you would prefer someone else to deal with your creditors.
But for most people, simply requesting a copy of your credit report and then spending some time to check it over for errors is usually a far better option, and one that will save you money rather than adding to your debt.
How to Get Out of Debt
One of the biggest signs of credit trouble is when you get to a point where you can no longer pay what you owe (debt) with the money you are earning. As a result, you dip into your savings to repay that debt, or even worse, try to get a loan to cover it.
Once you get into this downward spiral it can be an extremely difficult situation to reverse, and so is something that you should definitely try to avoid.
If you are not sure as to whether or not you have a debt problem, or are on track for financial trouble in the future as a result of your debts, answer the following questions as honestly as possible to find out:
• Are your debts making you unhappy?
• Do you feel pressure from the debts that you have?
• Do you feel bad for being in debt?
• Have you ever lied to receive credit?
• Does the idea of borrowing more money give you relief?
• Do you try to distract yourself or forget about the debts you have?
• Are you worried when someone examines your credit history?
• Do you have more than one credit card, or line of credit?
If you mostly answered yes to the questions above, then there is a good chance that you are headed for serious financial trouble in the future.
Doing something about it now can help to avoid this, or minimize the damage if you are already heavily in debt.
Getting Yourself Out Of Debt
If you are in debt, then the first thing that you should do is to stop accumulating more debt.
Since using credit cards probably got you into debt in the first place, it would be a good idea if you cut them up and instead used cash or a debt card that does not allow you to get overdrawn.
Once you have stopped accumulating extra debt, you can then work on reducing the amount of debt that you are in by using one or more of the methods detailed below:
1) Know How Much You Owe
Sometimes when people are in debt, they try to forget about their debt and pretend that it doesn’t exist. As a result, they forget about how much money they owe and how much they will owe with the accumulating interest.
So make sure that you know exactly how much you owe by contacting whoever you owe money and asking them for your outstanding balance.
2) Form a Payment Plan
Even though you may owe a certain amount of money, you might not have to repay all of it.
Contact your creditors and let them know that you intend to repay your debt, but that you are struggling to do so at the moment. Ask if it is possible to reduce the debt, and then agree to a repayment plan.
Very often the creditors will be happy for you to pay a reduced amount if you will pay that debt off immediately, or within an agreed upon timeframe.
3) Get Extra Money
The only way you can get yourself out of debt is to obtain some extra money. Often, the best way to do this is to get a second job, but if you are heavily in debt, then you may have to consider asking a family member or friend for support.
4) Sell Assets
Another way to earn an extra income is to sell your assets, such as any stocks or precious metals which you may have. If things are really bad, you may even want to consider selling your car or home and downsizing.
5) Use Your Savings
In an emergency, you can use your savings to repay your debt. This makes sense if you are heavily in debt because you will be paying back much more in interest on your debt than what you would be earning from the interest on your savings.
6) Face Your Debt
To get out of debt, you must face the reality of your situation and deal with it in the best way that you can.
You must take personal responsibility for the situation that you are in, and recognize that the only person who can get you out of debt is the person who got you into it in the first place.