A new apartment, dreams of your own home in a decent neighborhood with good schools, or the growth of your business – these are the investments we often leave up to credit. Nearly half of American adults, accounting for 47%, have substantial credit card debt. And approximately 20% of the U.S. adult population have been late with payments in the last twelve months. Despite the average good credit being on the rise, many people are still struggling to make payments on time and find themselves hopeless in the battle with bad credit.
If you googled “raising your credit score fast” and were brought here – you are in the right place. We constructed a comprehensive guide to help you understand credit, its scoring system, and provide you with the essential knowledge to boost your creditworthiness in the eyes of a potential lender.
Let’s start from A to Z:
Introduction to Credit
“Treat yourself Premium,” “Buy what you eyed,” “privileged membership” – those are all brilliant slogans attacking consumers each and every day. You see the large billboards calling your name to open another account and treat yourself to the possessions you cannot afford. Credit is undoubtedly a modern wonder of the world that may help you experience a better life or make a living hell on earth. This is why so many people fall into the trap of spending vast amounts of money that they cannot repay. The illusion of keeping your personal bank account intact while indulging in whatever life has to offer often leads to troublesome circumstances, causing your credit score to drop.
Credit is an essential part of life. Responsible handling of your finances, including loans and credit lines, is often crucial for survival. For those and many other reasons, you need to start from the basics and understand the factors that may bring many sleepless nights.
The 5 C’s Creditors Use to Evaluate You
What are banks looking for when evaluating your candidacy for credit or a loan? Yes, you are being assessed even long after your education ended. But this time, your grade is based on a meticulous system designed to generate a three-digit number that will guide potential lenders in their decision-making process.
It’s time you become acquainted with the big 5 C’s of credit:
Capacity is essentially your cash flow. Lenders want to assess whether your income or business will be enough to repay the loan while also considering personal expenses and other debts. Besides cash flow, your previous payment history is a good indicator that you may live up to your promises by committing to your financial obligations.
Character evaluation doesn’t require personality tests or psychological tactics to give lenders an insight into your true self. Instead, they look for factors that make you a good asset. If you are applying for a loan to support or grow your business, the “investors” need confidence in your ability to succeed. They will consider your background, education, skills, industry knowledge, experience, and criminal record.
Be prepared for your credit history report to be thoroughly examined. It might be a good idea to obtain free records before setting an appointment with the potential creditor. By scanning your credit report, you can catch any inaccuracies or delinquencies that may be questioned and provide an explanation that may grant you the loan despite a lower credit score.
Condition is one factor that you have minimal control over if any at all. Lenders assess the current market situation, including the general economic health and the prospects of your industry. The type of work you do may have an impact on the decision, evaluating possible layoffs, and current industry trends. Typically, you are more likely to get a loan during expansionary periods, when the economic conditions are more favorable.
Capital is your overall commitment to the loan you are pursuing. If you are seeking a personal loan, be ready to provide some comfort in the form of a down payment. Businesses are usually screened for any personal investments into the enterprise.
Collateral is the bank’s security in case you cannot repay the loan in the future, which basically means the bank can step in and take what is lawfully theirs. Collateral could be your car, equipment, or any real estate.
Overview of the Credit System
Before the era of electronic purchases, banking and obtaining a loan were executed in a face-to-face manner. It consisted of persuasion tactics, proof of employment, and personal references regarding your character. During that time, banks were secured with a borrower’s collateral, but with the rise of electronic purchases, securing a loan became much more complicated. Hence the emergence of credit reporting and scoring, which were designed to help financial institutions gather a collection of your activities and establish consumer creditworthiness.
Between the 1950s and 1960s, institutions started working closely to come up with a way to share consumer data, including payment history and account balances. Before three key players appeared as credit reporting leaders, TransUnion, Equifax, and Experian, early credit bureaus were strictly related to local communities.
To legitimize the business, Congress passed the Fair Credit Reporting Act (FCRA) in 1970 to ensure proper handling of consumers’ data. It wasn’t until the 1980s that a more comprehensive approach was taken, and credit bureaus commenced an electronic method of storing consumer personal and credit-related information.
5 Surprising Ways Credit Affects You
In a perfect world, financial matters would only affect the finances – your ability to get a loan or a mortgage on a house. Unfortunately, there are other ways your credit can affect you.
Getting and keeping a job
Even though it is a myth that your credit score affects your employment, your credit report might be screened by potential or current employers. Like lenders, the company may want to assess your character and confirm you are financially responsible without carrying the burden of debts. Employers may evaluate your credit report only with your written consent to make a hiring or promotion decision. The screening of your credit report as a hiring practice is not exercised in all states.
Renting an apartment
A few property managers and landlords may ask to review your credit before approving your application for an apartment. While you may still rent an apartment with poor credit, you may be required to place a larger security deposit.
Acquiring a cell phone
Without a doubt, the latest technology has skyrocketed, and so did their prices. Expensive cell phones may be purchased in installments with or without a down payment. The carrier may perform the same assessment many creditors do to ensure you are able to make timely payments over time.
Establishing utility accounts
Again, utility companies may employ the same process of credit report screening as abovementioned providers. Before you open an account with gas, water, or power, your credit may be assessed to ensure you can pay your financial obligations. If you suffer from poor credit, you may be required to secure a deposit.
Sadly, your insurance premiums may be based on your credit in some states. As outrageous as it sounds, our country is not known for making things easier in the healthcare department either. The insurance score, however, differs from your typical credit score, but it is solely based on your credit report. On a positive note, if your credit history is outstanding, you can use this to your advantage to negotiate better terms and premiums.
How Much Good Credit Saves You
Having a flawless and excellent credit score can save you a lot of time, hassle, and money. Low credit score contributes to sleepless nights, stress, poor health, lower quality of life, and many other devastating life circumstances.
Previously, we listed all the surprising ways credit can affect you, which, when reversed, can be to your benefit. With a substantial credit score, you will have better opportunities when renting an apartment on favorable conditions, landing and keeping a decent job, having a better chance at being promoted, and getting great insurance with reasonable premiums.
An adequate credit score will get you better rates on car and homeowners insurance as well. The assessment relies on credit-based insurance scoring, which relates to the management of your finances. Car insurance providers, such as Nationwide, may evaluate risky behaviors based on how you handle your money. If your credit score is impeccable, you can fight for beautiful rates with tons of savings.
Lower interest rates on all loans is a great advantage of having that perfect credit score. Whether you are looking to upgrade your car, remodel your home, or get a personal loan, adequate credit will generate many savings and better conditions.
It is no surprise that many credit card providers offer a rewarding system for their users. The better your credit, the better the perks and rewards you can access. Cardholders can enjoy free access to exclusive events or streaming services. You may opt for travel benefits if you prefer the adventure and gain points for miles, sometimes even fly for free.
Your reputation is on the line with dropping your credit score. By rebuilding and establishing a spotless credit, you are increasing your chances of a brighter future. Banks will not reject your application and offer agreeable terms in case your life takes an unexpected turn.
Understanding Your Credit Reports
Your credit report is an integral part of the entire loan approval process. Understanding its components may help you prevent future financial mishaps and detect any inaccuracies that may hurt your credit and, consequently, lower your credit score.
Your credit report contains your personal information, such as your name, address, and Social Security number. In addition, credit bureaus collect the information related to your borrowing activity, including your inquiries, payment history, and balances on all accounts.
Who Maintains Your Credit Information
Who maintains your credit information and who is responsible for keeping it fair and square are two separate questions. While creditors and credit bureaus work together to maintain and update all of your credit information, it is your responsibility to ensure all the data stored is accurate and up-to-date. Unfortunately, even in a high-tech world, mistakes and oversights still happen, which may have a substantial impact on your creditworthiness. You would be surprised how often mix-ups occur on credit reports, varying from errors of your personal information to outdated entries and false items.
How to Get Your Credit Data for Free
Now, let’s get to the point. The first step to rebuilding your credit and raising your credit score quickly is to obtain your credit reports. You can get your credit data for free once every 12 months from the three nationwide credit reporting bureaus. The only federally authorized website is annualcreditreport.com, where you can securely order your credit reports.
How to Review Your Credit Reports
Besides catching any inaccuracies, regular monitoring of your credit report can safeguard you against fraud. Your credit report’s annual review is a significant step to achieving the credit score of your dreams.
First things first, start from top to bottom and inspect your personal information. Some common mix-ups include misspelled or incorrect name, address, phone number, altered Social Security number, multiple or inaccurate birth dates, and incorrect or outdated employment status.
Another section refers to your accounts, open and closed. Look for all unrecognized accounts under your name, including revolving and installment accounts. Check if all closed accounts that are listed do not appear as active. Incorrect payment history is another major contributor to your overall credit score, such as a current account marked past due. Make sure that you are the account holder of each account listed on your credit report and if all limits and balances are accurate. Inspect your credit report for all utility, phone, and streaming accounts.
Inquiries refer to all hard inquiries when creditors pull your credit report. Common issues include an unauthorized drawing of your data, which may indicate fraud.
The public records section contains everything related to bankruptcies, liens, foreclosures, or civil suits. Check if the information provided is accurate and whether you have been involved in these processes. Make sure that any outdated entries are removed from your credit report.
Disputing Inaccurate Credit Information
The Fair Credit Reporting Act is your lawful shield in protecting your information and correcting any inaccuracies on your credit report. Under the FCRA, lenders and credit bureaus are accountable for fixing any caught mistakes.
You may use sample dispute letters available online to inform the credit reporting company about any inaccuracies that you noticed on your credit report. Provide copies of documents that support your case. Your letter should include your full name and address and identify each item you want to dispute. In addition, provide an explanation as to why you wish to dispute the entries with a request to remove or fix the faulty data. To make matters easier, include your credit report with the highlighted items and send the letter via certified mail.
It might take up to 30 days for credit reporting agencies to investigate your case. They will communicate on your behalf with the creditors or lenders that furnished the questioned information to the credit bureaus, and the providers must examine the dispute themselves. If all goes well, the furnishers will inform all three nationwide credit bureaus that a mistake has occurred. You should also expect a notice from all the parties on the status of your request.
Keep in mind that the process may take months, you may have to provide additional or missing information, and have patience and determination to continue your attempts. Credit dispute is a lengthy and time-consuming process, so don’t expect overnight changes.
Talking with creditors may be quite intimidating, especially if you do not possess the appropriate knowledge of the industry. It may require negotiation skills, diplomacy, and polite boldness to get what you want. If you find yourself unfit for the job, you may seek help from reputable credit repair companies, who specialize in the field, have expert knowledge, understand the market, and have a long-lasting relationship with financial institutions. It may save you time and money in the long run, provided you find the right match with an unblemished reputation. Despite the popular opinion, legitimate credit repair companies exist and follow all guidelines under the FCRA. Some may even provide credit counseling with personal account managers to help you build a better, brighter future.
How Long Do Black Marks Stay in Reports?
On your credit report, black marks or derogatory marks are all negative items, such as missed payments, collections, or bankruptcies. Here is a breakdown of all possible negative entries and the typical period they remain on your credit report:
- Missed payments – 7 years
- Charge-offs – 7 years
- Collections – 7 years
- Repossessions – 7 years
- Bankruptcy Chapter 13 – 7 years
- Bankruptcy Chapter 7 – 10 years
- Student delinquency or default – 7 years
- Foreclosure – 7 years
Essentially, nearly all negative items remain on your credit report for up to 7 years, except bankruptcy Chapter 7, which may be active for up to 10 years. If any of the entries on your credit report seem outdated, do not hesitate to dispute them, as they do continue to hurt your credit score and keep you at bay with creditors.
How to Build and Maintain Excellent Credit
Building and maintaining an outstanding credit does not have to be a lengthy process consisting of stress, emotional roller-coaster, and constant rejections from lenders. You may start working now and improve your credit score in no time.
Your Account Payments
Missed or late payments may seem innocent, and if it is a one-time occurrence, your creditors might oversee the mishap. However, your forgetfulness or the inability to pay off your debt constitutes a large portion of your overall poor credit score. If your payment is late the entire billing cycle, usually 30 days, you may experience a significant credit score drop by up to 100 points.
Life is unexpected, and sometimes, despite your efforts, you may find yourself unable to pay the balance on your credit cards or loans. If that happens, such as the loss of a job or sudden death of your family’s provider, don’t be afraid to communicate your challenges with creditors. They may help you get back on your feet and make you an offer that can save you from further trouble.
Avoid late payments at all costs, even if you have to make minimum payments every billing cycle.
Your Available Credit
The credit utilization ratio is your overall revolving credit versus your current debt. Typically, your credit usage should not exceed 30% on all of your accounts, and your available credit should be at least 70% at your disposal. Maxing out your credit cards will do you more harm than good, so you might want to reconsider your spending habits and reanalyze whether the purchase is, in fact, necessary.
If you cannot repay your financial burden at once, do more than paying the minimum amount each month. One way to get out of debt faster and improve your credit utilization ratio is to consider the micropayment approach. Instead of making monthly payments, make smaller payments but more frequently. If your minimum amount is $25, pay $10 every week, which not only shows creditors that you are seriously committed, but you are also putting in more than the minimum payment without sacrificing your budget. Remember that you most likely have interest rates on your credit cards or loans. If you end up paying the minimum on your account each month, chances are you will not see a significant improvement in your balance.
Closing Credit Accounts
You paid off your credit card and decided to close it before you fall into another trap of unwanted purchases. It’s time to rethink that decision. Closing your credit card affects your credit utilization ratio as your total revolving credit drops as a result. Instead, keep the account open to maximize your credit’s potential. Make sure that the terms of your credit agreement do not specify closing the account due to inactivity. If that is the case, make small purchases from time to time, such as pumping gas or buying a cup of coffee, and pay off your dues immediately.
Using a Secured Credit Card
Getting a secured credit card might be the best option when it comes to building or repairing your credit, provided you know how to use it responsibly. Secured credit cards differ from your typical credit cards as they require some cash deposit before opening.
Find an issuer with a deposit you can afford and shop around for the best terms. Secured credit cards are easier to obtain but can be corrupted the same way regular credit cards do: by maxing out the balance and not making timely payments.
Your Credit Inquiries
If you want to check your credit score without hurting it, make soft inquiries that do not affect the scoring. However, shopping around for a credit card and applying wherever you can will, in effect, cause a significant credit score drop. Those are called hard inquiries, and they do impact your credit and get reported to credit bureaus.
Your Mix of Credit
Another way to build your credit quickly and effectively and raise the bothering credit score is to mix up your credit a little. Instead of opting exclusively for retail credit cards, take out a personal loan that you can pay off on time. Maybe you need to upgrade your car? Try coming up with a sufficient sum for a down payment and shop for the vehicle you want and can afford. Mixing up your credit shows lenders that you can handle any type of financial commitment, be it installment loans or a mortgage. The point is not to get yourself into more debt but rather keep meticulously calculated expenses for a specific purpose.
Your credit is your baby. Without proper care and management, it will not flourish and repay you in the future. Taking care of your finances and changing your financial habits are essential components of getting on the right track. Remember, you don’t have to do this alone. Qualified and legitimate credit repair companies can help you achieve your ultimate goals.