Big, bad problems can happen to you – bankruptcies, divorces, law suits, non-payment of taxes.  These are big problems that can affect your credit score in as big way.  If you have faced a large problem that has ruined your credit, you need to take action fast and work consistently to boost your FICO score:

If you have bad credit, establish better credit by taking out credit and repaying it quickly

If you have terrible credit following a bankruptcy or other major financial upheaval, you may need to get back into a good credit rating by taking out a loan you can handle.  Make an appointment to see your bank or bad credit lender a few months or years after the problem in question and arrange for a small loan.

You should have enough savings to pay for the loan before you do this.  Pay back the loan quickly.  It will not hugely boost your credit score but it will show lenders that you are having an easier time paying your bills.  Taking out a small loan you can repay is part of the slow process of reestablishing good credit following a big financial problem.

Try secured credit if you cannot qualify for other types of credit

Secured credit is credit or a loan which uses something as collateral.  In some cases, this could be an asset like a house.  In some cases, this collateral could be money frozen in an account by the bank for just such a purchase.

If you need credit following a big problem with your credit score, secured credit may be something you can qualify for. You can use this secured credit to reestablish a good credit rating so that you will qualify for other loans in the future.  You may have to pay slightly higher interest if your credit score is quite low, but in the long term repaying this type of loan can improve your credit score.

Give it time

Many people believe that simply paying off debts will improve their credit score at once.  This is not true, unfortunately.  If you have experienced a bankruptcy, have been reported to a collection agency, or have had charge-offs, the record will remain on your credit report – even after you have repaid your debts and resolved the problem.

In fact, major problems such as a bankruptcy will remain on your credit report for seven or ten years, affecting your credit score.  Even if your credit problems stem from simply not paying bills on time, it will take some time for the mark to fade from your credit report and for your credit score to reflect your better repayment.

Paying off your debts and resolving problems will help your credit score (since overdue accounts will be marked as “paid” on your credit report), but only time will remove the mark of the problems from your record entirely.

This means that if you have faced a major setback such as a bankruptcy, you may have to wait in order to get the best interest rates on larger purchases.  The good news is that the further away you are from a major financial problem, the less dire it appears.

For example, if you have declared bankruptcy, you can expect it to have a huge impact on your credit score for the first two years, during which time you will have a hard time getting any credit at all.

However, after two or three years, if you have been paying your bills on time, then the bankruptcy from two years ago will matter less because you have been rebuilding your credit.  Your credit will still suffer – but you will slowly be starting to work your way out of the credit problem.  Persistence and good financial habits will get you there.

This means that if you plan on making a major purchase (such as a house of car) that may require a loan, you should start working on improving your credit well in advance – even years in advance – of your actual purchase.  This is because you simply will not have enough time to radically alter your credit score in time if you wait too long.

Even if your credit score is already fairly good, you may need to give yourself several months of time to boost your credit rating enough to get the best loan rates.

Read the full story

There are a few things that people do without realizing it that have a bad effect on their credit score.  Follow these tips to avoid the common traps that can sink your credit risk rating:

Beware of debts and credit you don’t use.

It is easy today to apply for a store credit card that you forget all about in three years – but that account will remain on your credit report and affect your credit score as long as it is open.  Having credit lines and credit cards you don’t need makes you seem like a worse credit risk because you run the risk of “overextending” your credit. 

Also, having lots of accounts you don’t use increases the odds that you will forget about an old account and stop making payments on it – resulting in a lowered credit score.  Keep only your used accounts and make sure that all other accounts are closed.  Having fewer accounts will make it easier for you to keep track of your debts and will increase the chances of you having a good credit score.

However, realize that when you close an account, the record of the closed account remains on your credit report and can affect your credit score for a while.  In fact, closing unused credit accounts may actually cause your credit score to drop in the short term, as you will have higher credit balances spread out over a smaller overall credit account base. 

For example, if your unused accounts amounted to $2000 and you owe $1000 on accounts that you have now (let’s say on two credit cards that total $2000) you have gone from using one fourth of your credit ($1000 owed on a possible $4000 you could have borrowed) to using one half of your credit (you owe $1000 from a possible $2000).  This will actually cause your credit risk rating to drop.  In the long term, though, not having extra temptation to charge and not having credit you don’t need can work for you.

Be careful of inquiries on your credit report.

Every time that someone looks at your credit report, the inquiry is noted.  If you have lots of inquiries on your report, it may appear that you are shopping for several loans at once – or that you have been rejected by lenders.  Both make you appear a poor credit risk and may affect your credit score.  This means that you should be careful about who looks at your credit report. If you are shopping for a loan, shop around within a short period of time, since inquiries made within a few days of each other will generally be lumped together and counted as one inquiry. 

You can also cut down on the number of inquiries on your account by approaching lenders you have already researched and may be interest in doing business with – by researching first and approaching second you will likely have only a few lenders accessing your credit report at the same time, which can help save your credit score.

Be careful of online loan rate comparisons.

Online loan rate quotes are easy to get – type in some personal information and you can get a quote on your car loan, personal loan, student loan, or mortgage in seconds.  This is free and convenient, leading many people to compare several companies at once in order to make sure that they get the best deal possible. 

The problem is that since online quotes are a fairly recent phenomenon, credit bureaus count each such quote estimate as an “inquiry.”  This means that if you compare too many companies online by asking for quotes, your credit score will fall due to too many “inquiries.”

This does not mean that you shouldn’t seek online quotes for loans – not at all.  In fact, online loan quotes are a great resource that can help you get the very best rates on your next loan.  What this information does mean, however, is that you should research companies and narrow down possible lenders to just a few before making inquiries.  This will help ensure that the number of inquires on your credit report is small – and your credit rating will stay in good shape.

Read the full story