Bad credit can have a huge impact on your financial life, whether it’s getting a mortgage loan or financing auto purchases. It’s important to lenders and is used to determine if you’ll get approved for a loan and your interest rate charges. It is vital that you maintain good credit to boost your chances of having favorable financial dealings. Still, circumstances arise that can have a negative impact on your credit, but there are ways to restore its health. Let’s look at five steps that you can take to improve your credit and get you on the right track to securing your finances.
1. Check Credit Report
Do a credit report check to know precisely what your status is financial. A credit report will reveal the areas that you need to address, such as credit utilization and late or missed payment. A full credit report can also highlight errors and fraud that can bring down your credit score. Tackle inaccurate financial information and inconsistencies; dispute them and fix them as soon as possible. In the instance that you fall victim to identity theft, place a freeze on your credit to prevent further damage.
2. Catch Up on Payments
Payment history is the single most important factor that weighs heavily on your credit score. Late payments wreak havoc on your credit and until it is addressed you cannot improve your credit health. Take steps to bring all of your accounts up-to-date, and if need be, reach out to your creditors and inform them that you are interested in sticking to your payment obligation, but would like to set up a payment plan. You may find that you can make an arrangement that is ideal for your circumstance and one that your creditors find workable.
3. Lower Credit Card Debt
Credit card debt is considered a bad debt and directly impacts your credit score. Your credit score can fluctuate with each credit card balance reported to the credit bureaus. The higher your credit utilization is compared to your credit limit, you are looking at a lower credit score. A lower credit utilization ratio is encouraging to lenders because it indicates that you can responsibly use credit. Strive for a credit utilization ratio of less than 30% and pay up to 20% of your overall credit card balance, which can help to improve your credit.
4. Keep Accounts Open
As aforementioned, strong credit history is important, and closing accounts disrupt that history. Paying off an old balance is a good move and you may be relieved with that accomplishment, but closing an account has the potential to damage your score. While a zero balance is good for your credit utilization ratio and credit score, the absence of credit history is not something that lenders care for. So, keep accounts open to secure a substantial credit history.
5. Resolve Collection Accounts
If you have no collateral, bad credit, and unresolved debt, lenders have no assurances that you’ll be able to make loan payments. Collection accounts will certainly make their way on your credit report, where you are flagged as high risk to lenders and damage your credit for years. The damage is done, whether you settle them or pay in full. While it is tough to get collection accounts off your credit report, it is not impossible. You can ask for a goodwill deletion if you have already paid the debt, which would take away the source of the damage to your credit.
It is possible to improve your credit and secure your finances, but you have to take active steps where necessary. It involves lowering your credit card debt, catching up on late payments, resolving collection accounts, checking your credit report and keeping accounts open to maintain a visible and substantial credit history.