If your credit score is less than 680, you need to fix your credit. Before you can fix your credit you need to know what is impacting your credit and causing it to be lower than you want. (Check out “Credit is King” if you want a refresher on the components of credit and its uses.)
There are services which will charge you to fix your credit, we are going to show you how to do it for FREE.
Step 1. Sign up for credit monitoring service.
The three major credit bureaus are: Experian, Transunion, and Equifax. These services provide ongoing credit monitoring and will give you up to 2 free credit reports per year. However they tend to hook you in by asking for your credit card information and then rely on you to forget you signed up for a limited time free service, and will place recurrent monthly charges to your account. WE don’t want this. WE want credit monitoring that’s low cost and preferably free. Our recommendation is signup for a credit karma account which will provide you access to two of the major bureaus for FREE.
Credit Karma will also show you a rough estimate of what is depressing your score. These are the areas you will need to address. However today we are going to address all of the components and give you the resources and knowledge to correct them.
Step 2. Fix your payment history
65% of your credit score is made up of two components: Payment History and Amounts Owed (I.e. Debt-to-Credit Ratio (DCR)). One late payment or a DCR greater than 30% will have significant impact on your credit score. Don’t worry however, these things are readily correctable once you know the system and employ a few not well known hacks.
YOU have to pay everything on time each month. This goes without saying, however it’s easy to forget about a bill when life is coming at you fast. WE are human. Mistakes happen. However companies are not very forgiving. Most companies will report your late payment to the credit bureaus if they do not receive payment with 30 days following the due date.
Thats an important number folks: 30 days. So if you miss a payment, be sure to get your account back up to date before the 30 day mark, or more than likely your account will be reported and it will be noted on your credit report. Now why is this a problem? It can take up to 3 years or more to have the notice fall off of your credit report. 3 years for missing one payment!! Is that fair? Hell no it isn’t, but we can fix it.
Removing late payments from your credit history.
First thing you want to do is contact the company who reported you and ask them to remove the negative mark. Sometimes this is all you need to do. A 15 min phone call will prevent 3 years of waiting. Not bad.
Often they will ask you to send in written correspondence to make the request formal. Thats fine, because Nerd Wallet has a great sample letter which you can use to complete this task.
To prevent this from ever happening again, we recommend you identify a checking account or open another checking account to use specifically for bills throughout the month. Based on your budget you know how much you’ll need to deposit into that account each month to pay your bills. Next, we recommended establishing an allotment or automatic transfer on payday. You’ll then setup automatic payments with each creditor and link it to your bill pay account. Automatic payments will prevent late payments in the future and ensure you receive the full positive impact of your payment history and boost your credit score.
Step 3. Decrease your amount owed or debt-to-credit Ratio (DCR)
DCR has a 30% impact on your overall credit score. Thats huge!! DCR is calculated by looking at the total balance across all of your lines of credit and dividing by the total amount of credit available.
| Example: John Doe |
| Total Credit Balance: $2000.00 |
| Total Credit Limit: $3000.00 |
| DCR: 66% |
Now here is where we start to hack the score.
An ideal DCR is less than 30% and we can achieve this in the above example one by increasing our total credit limit to at least $6700 or by decreasing our total balance by $1100 or more.
| Example: John Doe | Scenario 1: Increase your total credit limit | Scenario 2: Decrease your total credit balance. | |
| Total Credit Balance: | $2000.00 | $2000.00 | $900.00 |
| Total Credit Limit: | $3000.00 | $6700.00 | $3000.00 |
| Debt-to-Credit Ratio: | 66% | 29.8% | 30% |
In our opinion, scenario two is going to be more difficult and take more time. To accomplish the results in scenario two, we will need to pay more than the minimum payment each month to accelerate the decrease in balance and would require additional cash which we may or may not have. It definitely doable but it will take time.
Now, there are other options such as credit card consolidation loans, personal loans, and phoning a friend, however again, these options take time. If you are in need of an increased credit score in the next few weeks (or months), scenario two might not be in your best interest.
If you’re on a time crunch, scenario one can take as little as 15 minutes to complete. The first step is asking your bank if you can have a credit limit increase. However make sure to mention you do not want a “hard” credit pull in order to complete this. A hard pull can have a negative effect on your credit up to 3 months following its occurrence. This negative effect is easier to cushion, the higher your score is.
If your bank says no, your options at increasing your credit limit require opening another card to achieve the higher limit or asking a close financially responsible family member (parent/sibling) to add you as an authorized user on their credit card which has a high limit, low balance, great payment history, and has been open for a long period of time. It’s very important that you’re listed as an authorized user. This designation will allow you to absorb their credit history and their credit limit as your own and will provide a significant positive impact to your credit score.
Step 4. Establish a lengthy credit history
A longer credit history may increase your score, however it does not guarantee a higher credit score. The age of your oldest account (and newest account), and the average age of all of your credit lines are important. The general rule of thumb is to limit opening new lines of credit to every 1-2 years. This category may have a smaller impact (10% of your score) however it is very important.
We can also hack this part of the score by piggybacking off of a family member’s credit history as described above. In fact, this is a great way for a parent to ensure their child has a great credit history at the start of their career.
Step 5. Monitor your credit mix
Your credit score will consider the types of accounts you have: credit cards, personal loans, student loans, mortgages, auto loans, etc.
There is no specific mix of credit accounts which have a significant impact on boosting your score, we recommend opening only the accounts you need.
Step 6. Limit opening new credit lines and inquiries
As stated previously, avoid opening up several new lines of credit or having multiple hard pulls of your credit history in a short period of time. This is a red flag to a bank/creditors and signals that you may be of higher risk to lend to and this will negatively impact your score. If you are planning to open a new line of credit, it needs to be for a specific purpose and have a positive impact in other aspects of your credit score.
Lastly your credit is your digital identity and street cred in the business world. You have to take responsibility for your actions. If you run into trouble and notice your credit score decreasing, take decisive action and stop the issue.
WE can all have credit scores above 720 as long as we know how the game is played.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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