How to Improve Bad Credit Quickly
May 27th, 2009, Written By: Kerri Randall
Be honest with yourself-you’ve made some mistakes with your credit, and unfortunately, they’re not all ones that you can dispute because, well, they’re your own fault. Rest assured you’re not the only one, especially in the current economy. If you want to turn things around, though, it’s time to take action. The sooner you get going, the more quickly your credit rating will improve.
First, get a copy of your credit report. You can get a free copy once a year from each of the three credit bureaus (Trans Union, Experian, and Equifax). If it does happen to have some disputable errors, contact your creditors and the bureau whose report contains the errors and start an inquiry to have them removed.
Once you’ve disputed any errors (or realized all of the “mistakes” are actually your own), you can work on your debt-to-income ratio. This is an important percentage, as creditors will look at it along with your credit score to determine whether or not they are willing to lend you money. If your income is high, but your overall debt is also high, this indicates poor financial management and decreases your chances of approval.
Start by adding up all of your recurring debt, including everything that has a monthly payment, such as your mortgage, car and student loans, credit card minimum payments, etc. (Don’t include monthly expenses like gas, food, or utilities. These aren’t considered loan payments.) Divide this total by your gross monthly income and you will get your percentage. Creditors will look more favorably on you if this number is below 36%, and even if your credit history is less than stellar, a good debt-to-income ratio can help you get approval on a loan that you might not otherwise get.
So what if your number is higher or on the border? Your first step here is to stop using your credit cards. Save them for emergencies only. Better still, start a savings account to use for emergencies so you don’t have to resort to using your credit cards. Take a serious look at your expenses and see where you can cut back. You can then place the extra money into your savings account. (I speak from experience. You might think you don’t make enough to save, but start with even a small amount, and commit to depositing that amount with every paycheck or once a month, and you’ll be surprised how easy it is to build up a decent balance.)
If you can, pay more than the minimum amount due on your credit cards, and try to make it enough to really count so you’re not paying just interest. Look into doing the same thing on your loans, provided there is no penalty for doing so. You’ll want to make sure of that before you go ahead with the extra payment. Either way, focus on paying down high-interest, revolving debt loans like credit cards first. Your credit score is boosted higher when you pay these down than when you pay down an installment loan, such as your car loan.
Once you’ve begun lowering your debt, aim to keep your balances at less than 30% of your limit. Ideally, 10% is the best, but the lower the better, so do what you can. Of course, it’s going to take time to repair your credit, but it’s better to start now so that you’re ready for your next big purchase or prepared for the next emergency.
Categories: Establish and Rebuild Credit
