An excellent credit score can be more precious to you than the things you want to acquire with it. But it can also be fragile and elusive. And, once broken or lost, it can be distressingly hard to retrieve. If your credit score has dipped or plummeted, it can be restored, but it will take time, forbearance and a new commitment to self-discipline.
In 1956, the data analytics firm Fair, Isaac & Co. was founded in San Jose, Calif. It established the fixture, called the FICO score, for consumer lending that remains in place today. The company has developed a scale to represent the amount of risk each borrower poses to a lender, based on the borrower's financial history and habits. Each lender sets its own standard for poor to excellent credit ratings, but, in general, FICO scores range from 300 to 850, according to the following scale: 300 to 629 is a bad score; 630 to 689 is fair; 690 to 719 is good; and 720 and up is excellent.
A number of factors can comprise or influence these scores. Typically, they are weighted about 35 percent by payment history. About 30 percent is the total amount owed. About 15 percent is the length of credit history. The other 20 percent is split between credit mix and new credit. When trying to repair or boost credit, keep these factors in mind while making buying decisions.
Why is it so important to attain and retain as high a credit score as possible? Because anything bought on credit depends on it, and the higher the credit score, the more attractive the loan will be: the chances for loan approval, lower rates and higher credit limits may all be enhanced. Trying to buy with a bad or poor score can disqualify you from getting a loan altogether. At best, the loan will cost you far more in interest, which, depending on what you are buying, can amount to thousands of dollars.
So reinvigorating that credit score is imperative. Here's how to begin the process:
- Always keep aware of what your credit score is and view your credit report. Along with Experian, Equifax and TransUnion are credit-reporting agencies required by law to offer free credit reports once a year to any consumer who asks. Read the reports carefully and thoroughly, making sure they contain no errors — even certain misspellings could negatively affect your score. Look for fraudulent accounts, too. If you find an error, report it, dispute it. It needs to be repaired by the credit reporting agency, and at no charge to you. Your credit score will not be included in the report, but there are several ways to get it, including from a credit reporting agency, a credit score service and perhaps even your credit card provider.
- Also, look for damaging items in the report from long ago. The law requires the removal of most negative notations after seven years — some liens or bankruptcies are extended to 10 years. In any case, don't allow outdated information to linger as a liability.
- Catch up on your payments if you have fallen behind. If you can't do it just by rearranging how you spend and pay, contact creditors to see if you can work out a schedule that satisfies you both. Try not to use more than 20 percent of your available credit line, as that can offset gains in your credit score by fouling your “utilization ratio,” which comprises the 30 percent segment in your score mentioned above. Try to make more than one payment per month, if the issuer allows it, in order to show progress and keep your balance under 20 percent of your credit line.
- If possible, accumulate an emergency fund in case you run into a period when your regular payment is simply impossible. Missing a scheduled payment carries the worst consequence for your credit recovery. Missing one by 90 days or often missing one by 30 days will make your progress virtually impossible.
- Don't close out credit card accounts, if you have a choice. You may not have a choice, however. If you establish a payment plan with a creditor, you may be forced to close accounts, but keep your oldest ones open as long as you can. The older the account, the greater the benefit to your credit score. If you have cards you rarely use, try not to close them, as keeping a card balance-free reflects well in your score. The best strategy would be to use them for a small purchase or two occasionally just to show some credit success. If (or when) possible, open a new card to make payments and demonstrate that you can be trusted with credit.
- Until you have raised your credit score to an acceptable level, you may want to consider what is called a secured credit card, which requires you to make a deposit to the card issuer so there will be a “fund” in case you miss payments. For example, if you make a deposit of $500, you will usually have a credit limit of $500. Your line of credit will be secured by the issuer having that deposit on hand. Whatever is not used to make payments can be refunded later. Make sure the payments you will make to the holder of the unsecured card will be forwarding reports to credit bureaus. You want it known that you are handling your credit responsibly and that it will be reflected in your future scores.
- Consider taking out a revolving or installment loan to build your credit score. A revolving credit account is like a credit card, in that you have an available limit and gain access to more money as you pay down the amount you owe. There is no fixed number of payments. An installment loan would be a mortgage or car loan, for example, with a pre-determined amount and a set number of scheduled payments. Remember, though, that gains in your credit score by paying whatever you owe through these types of loans could be negated by having too many loans. Too much debt will always work against you. Seek advice from your credit union (ALEC) in finding that zone where regularity of payments helps but the number of credit accounts doesn't hurt.
Once you have regained stability, don't let yourself imperil it again. It can take one to three months to start seeing improvements in your credit score. Depending on how badly you've damaged your history, it could take two or three years before you are truly back on your feet. But, by all means, protect yourself from ever falling into bad financial habits.
Don't overspend, don't abuse your credit, and build a fund for any future lapses. And take some comfort in knowing that, as distressing as your credit losses have been, they will have inspired you to learn and stick to best practices.