Repairing a damaged credit score is a worthy goal. It takes time to improve a score that's largely based on history but starting now is better than later. To address the solution, the scoring system itself must be addressed.
How credit is scored
Consider what you would want to know about someone before you loaned them money, not as a friend, but to earn interest. They’d like to know anything that could indicate the safety of their loan being repaid.
These are some of the most common metrics used to score credit, but they generally vary both in terms of factors considered and their importance depending on the credit scoring model used.
Length of credit/payment history
Credit mix / accounts owned
We can gather several meaningful takeaways. The lender likes to know if the potential borrower pays in a timely manner and in full, the amounts borrowed are responsible given their credit limit/income, there is a large amount of history to draw analysis from, if the borrower is attempting to extend their credit, and what different types of accounts they own (I.e., credit cards, mortgages, loans, etc.).
Work within the framework of your credit scoring model and improve your score by appeasing the factors it considers. Several options are listed below, and if you’re serious about improving your credit score the following options should be considered.
1. Review your account and dispute mistakes/fraudulent information
If there was a mistake made on the part of the company or if fraudulent activity occurred to no fault of you own within your account, report it. You may be eligible to have your score repaired. This is why you should take a close look at the line items of your credit card statement each month.
2. Pay it off
Your debt, not just your credit card debt, is specific to you and it could be harmful to receive misinformation from financial entertainers attempting to provide blanket financial advice. Talk to a PRO about your specific instance and don’t accept general advice.
3. Request a higher credit limit
This will lower your utilization if your spending is based on budget and won’t increase along with the raised limit. This method requires self-control to be successful.
4. Set a Reminder
Setting a reminder on your phone won’t directly impact your score, but this will prevent you from missing a payment out of forgetfulness.
5. Make a plan to eliminate your credit card debt
Again, like #4 this won’t directly impact your score, but it could be a tremendous help when carrying out #2 “Pay it Off”. Whether you choose to pay off the card with the smallest balance or highest interest rate first is a purely personal decision, but the math favors the latter option as it will cost less in total if the same payments are made towards your debt.
7. Ask for a boost
if you’ve recently missed a single payment or some other small issue has recently occurred and blemished your otherwise perfect record, you might be able to successfully make an appeal to the credit card company and be forgiven.
8. Get a secured card if you can’t trust yourself
A secured card makes it impossible to run up a balance like a standard credit card allows. Plus, it still builds your credit allowing you to help repair it.
Ultimately, we’re discussing the use of debt in everyday situations; to buy our gas and our food, to shop with online, and even on a one dollar snack from the vending machine. Using debt in this way, if done responsibly, can enable us to fly around the world with rewards points or earn cash back. However, if handled irresponsibly it can be the undoing of your finances and work against your plan to achieve your financial future.
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Michael G. Romanello is a registered representative of and offers Securities through Independence Capital Company Inc. Member FINRA/SIPC. 5579 Pearl Road, Suit 100 Cleveland, OH 44129
Investment Advisory Services offered through Independence Capital Company Inc.