FIVE Steps To Rebuilding Your Bad Credit
A good credit history is essential to having access to credit products such as mortgages, car loans, lines of credit and of course, credit cards. In fact, the first thing the banks checks is your credit history – your ability to borrow and repay credit based on agreed upon terms.
The famous credit score that banks get from Equifax or Trans Union to make a decision on your loan, interest rate and limit is based on a complex formula. However, you do not need to worry about the formula; simply follow the steps outlined below to make your credit score soar and become a wallet savvy consumer. Share these steps with family and friends and enjoy lower interest rates, higher credit limits and better credit card rewards!
Step 1: You need credit to rebuild your credit score
It is important to have a minimum of two revolving credit products (credit cards or lines of credit) to start building a higher score. For many, it may mean negotiating a local bank secured credit card (you pledge a security deposit for each dollar in credit – often 1:1) in order to have them report on the credit bureau. The limit on the cards does not really matter. It is ok to start small (for example $1,000) for each card or line of credit – the key is a minimum of two products that you use often. Please do keep in mind that you should NOT apply for new cards at every bank, store or gas station that you visit. Having more than six applications on file (yes – it does show upon your credit report) will significantly affect your credit score and limit your chances of getting a credit product.
Step 2: Pay your bill in full at least three days prior to the due date
There is nothing better for your credit score than paying the full amount of your bill a minimum of three business days in advance of the due date. You will be amazed to see how your score improves if you consistently pay your full bill four to six months in a row. Keep in mind that if you pay your bill online or at the ATM, you need to allow for an extra day or two for the payment to go through and report timely repayment on the credit report.
Step 3: Stay within your credit limit
Going over your authorized limit on your card is like drinking poison. Your credit score will take a deep dive faster than you can blink. Although the bank allows you to go over the limit, this is a major trap. Always keep an eye on your available credit and never go one cent over the limit. Even if you pay the bill in full, your credit score will have some immediate scars.
Step 4: Cash Advance is not your best friend
Believe it or not, cash advances can hurt your credit score and make it so much harder to build it back up. So as you rebuild your credit scores do not make any cash advances on your credit cards even if they are within your authorized limit. You will be grateful to save lots of money on the interest, but most importantly, you will keep your credit score high. Make sure you use your cards with big retailers and stick to only purchasing. You will benefit from an average of 21 day interest free grace period and some rewards based on your card.
Step 5: The 60% rule
Many make the big mistake of maximizing their credit cards to the card limit and then paying the minimum monthly fee. In reality, even though you are paying the agreed monthly fee on time, in the eyes of a bank, you are a high risk customer. Naturally, the credit score starts declining every month to alert the banks of this. So what do you need to do? If you need to keep a balance on your cards, try not to exceed 60% of your approved limit. This way, even if you make minimum monthly payments, your score is not declining. Additionally, if you keep balances on your cards, spread them across your cards (not exceeding 60% of each card limit).
Follow the simple rules above and see how your credit scores start to increase. The above rules are important to maintain as a good habit even when your credit scores are reputable. The higher your score, the more offers you will receive from the bank with better rewards, lower interest and higher limits.