Your credit report at each of the three credit bureaus—EquiFax, TransUnion, and Experian—contain information used by the bureaus to calculate your FICO credit score, which is used by lenders to determine if they will offer you a loan or other line of credit and at what interest rate. Part of maintaining a healthy credit score is checking your credit report to understand how and why it changes. It’s important to know some creditors and lenders may report to only one credit bureau, so it’s possible to have different information on each of your reports, and thus slightly different scores. Checking all three reports will give you a more comprehensive view of your credit history and show you how to repair your credit at each of the bureaus.
In order to understand how to repair and increase your credit score, you need to know what effects it.
Credit Utilization
Carrying too much debt on your credit cards in relation to the available credit on them will show a high rate of credit utilization. Your credit utilization rate is calculated by dividing your total credit card balance by your total credit limit (the credit maximum on each card, added together). A high rate tells lenders you may be relying on credit cards to get by, and so are at a high risk of defaulting.
There are several ways to lower your credit utilization rate, although only one of them is recommended as it will actually lower your credit card debt and positively impact your overall credit health. You could lower your credit utilization score by asking for credit limit increases on your credit cards with the highest balances, as this makes it appear you are not relying as heavily on your credit cards. The better option is to re-adjust or build your budget so you can aggressively pay down your existing credit card debt without accruing more. Consider using the snowball method, where you pay off the smallest balance first and then roll over that amount to pay down the next highest balance, all while making minimum payments on all of your cards.
Paying off Loan or Opening a New Credit Card
Believe it or not, paying off a loan—which is a good thing!—negatively impacts your credit score, because it affects your average age of open credit lines. A long credit history of open accounts helps your credit score, so paying off a loan removes the repayment history length from your overall credit history length. In a similar way, opening a new line of credit—one with no history at all—brings down the average age of your open credit lines.
It’s not a bad thing to pay off a loan or close a credit card with a high interest rate that doesn’t give you useful rewards, but you’ll still want to recover your lost credit score points. Do this by making on-time payments on all other loans and debts and not opening new lines of credit right away. If you want to see how closing a credit card will affect your score, use a free credit simulator online.
Hard Credit Inquiries
When you apply for any form of new credit—auto loan, mortgage, credit card, etc.—the lender conducts a hard inquiry on your credit report, which means they pull it from one of the credit bureaus to review. A single hard inquiry should only drop your score a few points, but multiple inquiries over a short amount of time can quickly add up.
To avoid unnecessary hard inquiries, get pre-approved or pre-qualified for a line of credit before submitting the official application, that way you can get a good sense of what you’ll be approved for and what interest rates to expect. This will help you only apply for forms of credit you can afford and are likely to get approved for.
Missing a Payment
Missing even one payment on a credit card, loan, or mortgage bill will be one of the biggest hits to your credit score, especially if it’s your first missed payment. Other bill payment history—like for your cell phone and utilities—aren’t reported to the three credit bureaus, but if you’re account becomes past due, it could be passed on to a collections agency, and that will show up on your credit report and reduce your score.
To avoid missing any payments, set up automatic payments on your credit cards and other loan bills, so there’s no chance you’ll forget. Many of these systems send you a reminder ahead of the due date, so you can check your credit union account and make sure you have enough money to pay the bill. You can also set up bill reminders on your credit union account to help avoid missing any kind of payment. It’s a good idea to monitor your credit score for free through websites like Credit Karma and AnnualCreditReport.com to ensure your payments are reported as on-time.
Derogatory Marks
These are worse than just unkind words about your credit score. In fact, they will result in the largest drop of your score, and they’ll stay on your credit report for up to seven years or more. Derogatory marks include tax liens, accounts in collections, bankruptcies, civil judgements, and foreclosures. Understandably, they are the most grievous since they represent major delinquencies in your ability to repay debts. But there is always a way to bounce back.
Use your free credit report check to make sure any derogatory marks belong on your report. If they are incorrect, file a dispute through the credit bureau’s website. If they are correct, follow any court-ordered repayment plans you have received or consult with a debt counselor to set up a budget and begin living within your means. This is your first step in building back up your score.
Many people want to know how long it will take to recover their lost points or begin to see significant growth in their score. There isn’t a hard-and-fast answer or rule because scores are calculated slightly differently across the credit bureaus and each credit file is different. Generally, for events like obtaining new credit, closing an account, or maxing out a credit card, the points can be recovered in around three months if you continue healthy financial habits like on-time payments.
For the more severe infractions of missed payments or defaulting on a loan, recovery could take over a year. Late payments typically remain on your credit report for seven years, so even if you have brought your score back up, it could still affect how lenders view you. Bankruptcy remains on your report for seven to ten years.
Even if all of these situations can’t always be avoided, there are always steps you can take to repair your credit score and report.
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