Your FICO® Credit Score, Part 2
6 things that hurt your credit rating — and how to fix them
If you read Part 1 of the FICO series, you know all about your FICO score. Just to recap, a higher credit score will help you with:
- Better interest rates, potentially saving you thousands of dollars over time
- Lower down payments
- Quicker approval of loans and services
- Lower car insurance premiums
Now we’re going to look at the most common problems that hurt your credit score, how to avoid them, and how to improve your credit rating.
Problem 1: Credit reporting errors
Fixes: Check your Annual Credit Report regularly. If you can show there are errors, you should be able to get them removed. To dispute your credit reports, contact the credit bureaus directly:
Tip: If you have old, paid-off credit cards that you don’t use anymore, DON’T cancel them or remove them from your credit history. They can help your debt-to-credit ratio and improve your credit score.
Problem 2: Identity Theft
Fixes: Each time you check your credit report, look carefully for activity that might be fraudulent. Contact the credit bureaus above to ask about any suspicious activity.
To guard against identity theft before it happens, you can “freeze” your credit.
Problem 3: Missed payments
Fixes: This is a big one. Missed payments can stay on your credit report for 7 years. The best advice? Don’t miss a payment. To ensure you pay at least the minimum payment due on time, each time:
- Set up autopay from your bank account or credit card
- Set up repeating events in your smartphone calendar to remind you when payments are due, or when your autopay account needs funds to cover bill payments.
If you DO miss a payment:
- Pay as soon as possible
- Call the lender and ask for forgiveness of any penalties, but don’t expect to get more than one free pass.
Problem 4: Maxed out credit cards
Fixes: Try using cash instead of credit cards. Most people find it harder to part with physical cash than just swiping a card, so if you don’t think a purchase is worth the cash, it probably isn’t worth putting on your card either.
Pay down credit card debt as much as you can each month. Credit card interest is typically your most expensive debt.
If you can only partially pay your credit cards, pay more towards the cards with the highest interest rate and/or are closest to the credit limit. A lower ratio of debt to available credit can help your credit score.
Do not continually open new card accounts to transfer debt. This can lower your credit rating.
Problem 5: Too many different credit applications in a short time
Fixes: Don’t repeatedly open new credit card accounts simply to transfer debt. Don’t respond to new credit card offers in the mail or at the store checkout. Multiple applications for different pieces of credit is a red flag to lenders, especially if they occur in a short time period.
However, if you’re shopping for a single loan — like a mortgage or car loan — where multiple lenders are running credit checks on you, trut to get them ALL done in a short time period. Your credit score won’t be hurt by credit checks for a single loan.
Problem 6: Defaults on loans; foreclosures; bankruptcy
Fixes: These kinds of problems can stay with you for a long time — 7 to 10 years. But the sooner you address them and start to rebuild a good credit history, the better off you’ll be in the long run. If you’re facing major problems like these, seek professional help with free resources like:
Tip: Many companies offer “credit repair” services, but this can be an expensive and unnecessary option. Ask for help from free resources before contacting a for-profit service.
Try to do everything in your power to avoid the problems that hurt your credit rating in the first place, namely:
- Keep your credit card balances low vs. available credit
- Pay your bills on time, and in full if possible
- Check your credit report at least once a year to make sure there are no errors or fraud
If you do have negative records in your credit history, follow the guidelines we’ve suggested here, and BE PATIENT. Rebuilding your credit score can take time. But it’s worth it.
If you can improve your FICO score by just one ranking — like going from “Fair” to “Good” — you can save up to 1% on your interest rates, a significant dollar amount over time.
Dime always has your back. Let us know how we can help you achieve your financial goals at 1-800-321-DIME (3463).