How to Fix Your Credit

First of all it is important that we understand what the credit score and how if affects your finances.  As shown on the figure below, there are several parameters utilized by the credit agencies that determine your overall credit score.

 

With that in mind, let's talk about the different things that influence your FICO score, also known as the credit score. This data comes directly from your credit reports that are maintained by the three reporting agencies.

Let us now see how each of the components listed above affect your credit score,

1. Payment History -- This category refers to your history of making payments, and it influences your FICO score more than any other single item. Your payment history includes just about every type of bill that you have ever had. Obviously, not paying your credit card on time negatively affects your score.
2. Amounts Owed -- This category reflects the amount of your available credit that you are currently using. It takes into account all lines of credit that you currently hold.
   Within this context, a lower percentage is better. If you are using 90% of your available limit, it shows that you cannot manage your finances properly and rely too much on credit.
3. Length of Credit History -- Now that you understand the basic concept, you can research the other factors on your own. This category simply refers to the length of time you've had credit accounts open. A longer, more stable credit history helps you maintain a good score.

Now that we understand the components that make up your credit score, let us discuss what you need to do to improve the score.

1. Be aware of what's in your credit report - By federal law, you can get one copy of your credit report from each credit agency, (Equifax, Experian, and Trans Union), each year. You can get all three at once, or spread them out through the year. Go to the AnnualCreditReport.com website.
2. Contact your creditors. Preferably not after months of harassing calls, but as soon as you realize you won't be able to make the requested payments. Most creditors are not as cut-throat as you think, and they will work with you to schedule smaller payments that fit your budget.
3. Get any agreement in writing. If you are able to negotiate lower payments, interest rates, or balance payoffs, request they send a letter confirming it.
4. Cut up the cards. Even if you do nothing else, stop charging, and keep paying at least the minimum on everything. Eventually, you will get them all paid off.
5. Keep some credit accounts open. Close no more than one or two every six months or so. A sudden burst of activity of any kind reflects poorly on your financial stability.
6. Pay off your debts. Once you've decided how much you can pay against your debts, and negotiated any lowered payments, you must allocate that portion of your budget to each creditor.
7. Create a budget. Calculate your income and your expenditures. The best way to figure your expenses is to track your spending for 30 days.

Lastly, I'd like to stress the importance of reviewing your credit reports once a year. This will help you spot errors, such as accounts that aren't yours, duplicate entry items, and other inaccuracies. These things can drag your score down lower than where it should be. Here are some tips on reading your reports.

 

Relevant Links

 

1. http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre13.shtm
2. http://www.creditinfocenter.com/repair/

Doug Fred is a freelance writer based in Jacksonville Florida. Doug’s writing focuses on topics of general benefit to men and women alike. His work has been featured in numerous times on Askmen.com and Dating.com.  

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