Repairing Your Credit Rating for the New Year

| January 4, 2013

Whether it’s a New Year, new decade or just a new day, it’s never too late for consumers to work on improving their credit reports which will raise their scores.

Since credit is such an important part of everyday life, why not strive to make life as easy as possible. No matter where a person’s credit score falls on the scale between poor and good credit, there are always a few things credit seekers can do to make their credit report more appealing to lenders.

Obtain a Credit Report and Credit Score

It’s best for consumers to get a copy of their credit report before beginning the credit repair process. The website provides free annual credit reports from the three major credit reporting agencies, TransUnion, Equifax and Experian.

Be advised, however, that only provides free credit reports. To obtain a credit score, consumers must pay a fee.

Check Credit Report for Errors

According to a 2004 survey conducted by the US Public Interest Research Groups, 79 % of their respondents had derogatory errors on their credit reports (for more information, see Mistakes Do Happen, 2004 and Automated Injustice-2009). That being the case, it is important to review and remove credit report errors as they may negatively affect credit scores.

Reduce Outstanding Debts

It’s not always possible to pay large chunks of money on outstanding credit card debts, but consumers who steadily work on reducing outstanding debt, improve their debt ratio which in turn improves a credit rating. Creditors ideally like to see a debt ratio (which is the amount of outstanding debt verses the total amount of debt available) of 35% or lower. Having such a low debt ratio improves credit scores.

Don’t Miss a Payment While Improving Creditcreditcard

Creditors attribute as much as 35% of a consumer credit score to bill payment history. Even more important than reducing the debt ratio is bill payment history. Therefore, to improve a credit rating, consumers should avoid as much as one late payment.

Find a Part-Time Job or Ask for a Raise

Additional income along with reduced living expenses does much to increase a consumer’s debt to income ratio. The debt to income ratio is a calculation derived by totaling monthly expenses and dividing it by monthly income. A debt to income ratio of 50% or higher is a sign of financial instability. Anyone with a debt to income ratio should seek consumer debt counseling.

Similar to the debt ratio, creditors look at a debt to income ratio of 35% or lower as favorable and thus such a ratio will do much to improve a credit score.

Strategically Apply for New Credit

For individuals who are trying to establish credit, make sure not to submit too many applications in a short period of time. A sudden rush in new credit activity is frowned upon by creditors. Space out new credit applications over a period of a month or so.

Remain Loyal to Creditors

Once a consumer is approved for a credit account, they should remain loyal. One of the factors considered when rating credit is the length of time an account has been opened. Establishing a long relationship with a creditor is positive, but jumping around from credit account to credit account shows financial instability.

The Credit Waiting Game

Unfortunately, some financially distressed consumers are forced into foreclosures, bankruptcies, judgments, late payments, short sales or other vehicles of getting out from under debt that they cannot repay. Such methods are recorded on credit reports and hang around for quite some time.

There isn’t much consumers can do but wait it out and work on improving other aspects of their credit. Such records generally remain on credit reports for a period of seven years. Keep in mind, however that the older the item is, the less impact it has. For example, a rash of late payments that occurred six years ago has less of an impact than late payments that occurred two months ago.

FICO Score Components

When it comes to calculating a FICO score, each item previously discussed carries different weight. Here’s the amount of weight the credit agencies attribute to the items that make up consumer FICO scores:

  • Payment History: 35%
  • Outstanding Debt Owed: 30%
  • Length of Credit History: 15%
  • New Credit: 10%
  • Types of Credit Used: 10%

Credit Report Improvement

No matter how bad a credit report may appear, there is always hope. With time, an action plan and conscious financial choices, consumers can do much to improve their credit reports which will in turn raise their credit scores.

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Category: Credit

About the Author ()

Felicia A. Williams is a wife, mother, freelance writer and owner of Tidbits About Money.

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