5 Ways to Repair Your Credit Score

A strong credit score can result in a lower home mortgage rate, a car buying rate, and better financial offers. Though we all try to maintain one, sometimes life throws us a financial curveball, and that score declines. What steps can we take to repair it?

1. Reduce your credit utilization ratio.

Credit utilization ratio (CUR) is the percentage of a credit card’s debt limit in use. Simply stated, a credit card with a $1,500 limit and a $750 balance due equals a 50% CUR for that card. Carrying lower balances on credit cards promotes a better credit score because it directly factors into the score.

Review your credit reports for errors.

About 20% of credit reports contain mistakes. Upon review, some borrowers spot credit card fraud and others notice botched account details or identity errors. Everyone is entitled to one free credit report per year from each of the three major U.S. credit reporting agencies – Equifax, Experian, and TransUnion. Consider requesting a report from all three at once to check for errors across the board from AnnualCreditReport.com, which is recommended by the Consumer Financial Protection Bureau. You can also find detailed instructions to dispute your score here.  

Behavior makes a difference.

Credit card issuers, lenders, and credit agencies use payment history as an indicator of future borrower behavior. Many lenders look for a low-risk borrower, so consider consistency when applying for long-term loans. Your overall score is greatly determined by the frequency and amount you borrow and pay back.

Think about getting another credit card.

The CUR is calculated across all credit card accounts with respect to the total monthly borrowing limit. For example, if you have a $1,200 balance on a card with a $1,500 monthly limit and you open two more credit card accounts with $1,500 monthly limits, your CUR will lower. Keep in mind that this will lower the average longevity, which minimally impacts the credit score. Also, the issuer of the new card will run your credit which can also negatively affect your score by a few points.

Think twice about closing out credit cards.

When you realize that the CUR takes all open credit cards into consideration, you can see why closing a credit card may be a bad move.

 Let’s say you have $5,000 in consumer debt among four credit cards with the same credit limit totaling $20,000. You close two of them accounting for $3,000 leaving you with a total debt of $2,000 and a total  credit limit of $10,000. In terms of CUR, you are now using 20% of your available credit as opposed to only 10% of available credit had you not closed those two cards.

 Beyond that, 15% of your credit score is based on the length of your credit history – how long your accounts have been open and the pattern of use and payments per account. This represents another downside to closing out older, little-used credit cards.

There’s still hope! If your credit history has taken a big hit, alternative credit scoring systems may be useful. TransUnion’s CreditVision Link or the FICO XD2 introduced new scoring criteria for borrowers who may be creditworthy but lack sufficient credit history to build a traditional credit score or need to rebuild their scores. Cell phone payments, cable TV payments, property records, and other types of data are used by these systems to generate a credit score.

 Maintaining a strong credit score is an important aspect of financial health and can increase your purchasing power. However, this is only part of a comprehensive financial plan, which should include a tax reduction strategy, a retirement income blueprint, and a wealth management method. To learn how you can obtain a custom-designed a retirement plan, click the link below, call 1-800-467-8152-, or email info@ronaldgelok.com to schedule a free financial strategy session.

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