If you really do have a horrible credit score, there is not much you can do about it short term. You need to first understand how your credit score is computed, which should help you understand why it’s horrible and what you could possibly do about it.
The five components of a credit score
Your credit score is a sort of three-digit representation of your credit reports. It’s created using an algorithm that’s known only to FICO, the people who invented credit scoring in the first place. No one but FICO knows what this algorithm is but it is known that your credit score is based on five components. They are.
Credit history
Credit usage
Types of credit
Credit history
Credit inquiries
Credit history and credit usage together account for 65% of your score. The other three components, types of credit, credit history and credit inquiries count for only 35% of your score. The net/net is that how you have used your credit and how much credit you used are the most important parts in computing your credit score. In fact, credit history accounts for 35% of your score and credit usage 30%.
What’s meant by credit history
Your credit history basically boils down to how well you’ve used credit. Have you made your payments on time? Have you defaulted on a loan? Have any of your accounts been turned over for collection? Have you had a judgment? All of these play a critical part in your credit history. The more of these negative items you have, the lower your credit score will be. Conversely, if you have none of these types of items in your credit report, this should have a positive effect on your credit rating.
How to improve your credit usage
There are two things you can do short-term that might help your credit score. The first is to work on your credit usage. This is based on your debt-to-credit ratio, which is the amount of credit you have available vs. the amount you’ve used.. If you want to improve your credit usage, you need to calculate your debt-to-credit ratio by dividing the amount of credit you’ve used by your total amount of credit. If you find you have a high ratio of 30% or above, you could improve it by paying down some of your debt.
Improving your types of credit
Types of credit is just what you might imagine – the different types of credit you’ve had. If you only have credit card debts, you could improve your types of credit by opening a personal line of credit, by getting a personal loan or by buying something on an installment plan.
What about a debt consolidation loan?
A debt consolidation loan can be a good solution for many people struggling with debt. However, if you’re already deeply in debt it would just mean digging the hole deeper. The last thing you need to do is take on more debt. For one thing, it would make your debt-to-credit ratio even worse. Second, as a wise man pointed out, you can’t borrow your way out of debt. You need to forget about a debt consolidation loan and concentrate instead on paying off your debts.
Get help with your debt
If you really want to know what to do, here is our suggestion. Try credit counseling. This can be a very effective solution because it could help you get out of debt and without borrowing any more money. You should be able to find a consumer credit counseling agency in your area because almost every city and town has at least one. Many colleges, unions and credit unions offer credit counseling. The agency Consumer Credit Counseling Services has offices in many cities. This agency is a nonprofit and offers its services at very low cost. When you go to an agency such as this, you will be assigned a counselor who will review your finances and help you develop a budget. He or she will also likely contact your creditors and negotiate reductions in your interest rates. Your counselor may also help you develop a debt management plan to pay off your debts.
Tips for other things you could do to improve your credit score
Check your credit reports – there could be errors that are dragging down your score. If you find one (or more), be sure to try to get it removed from your report by disputing it
Create payment reminders – this will help you make your payments on time, which as you have read, is a very important part of your credit score
Get current and stay current – the longer you have made your payments on time, the better your credit score will be
Understand that paying off an item that has gone to collection will not delete it from your credit report. It will stay there for seven years and there’s nothing you can do about it
Contact your creditors – if you’re having a hard time paying your bills, talk with your creditors. Most lenders will be willing to work with you if you’re experiencing a true financial hardship. One or more might be willing to let you skip a few payments or reduce your interest rates for several months. Some even have special plans for people who are having a hard time paying their bills.
Don’t move debt around, pay off it off
Don’t close any unused credit cards as a way to increase your credit score. It just won’t help
Don’t open a bunch of new credit cards just to help with your credit score. This can backfire and actually hurt your score.
Finally, here’s a short video that explains more about credit scores and how to get and keep a higher one.