As you probably already know, it is hard to qualify for a low rate mortgage or auto loan if you have a bad credit score. That's why it's in your best interests to fix your bad FICO credit score ASAP. And even if you did get approved the interest rate and fees would be rather high and maybe out of your budget to where it would not be a good idea to take the loan at all.
If you have some time, say 6 to 12 months, you can fix a bad credit score. Then once you have improved your fico score you can reapply and get approved at a lower rate and save money every month.
35% of your credit score is determined by your payment history. This is the largest factor. It is imperative that you maintain a solid on-time payment history all your creditors. Do what you have to do to make sure all your bills are paid on time. Set up automatic billing if you have to.
If you want to improve your credit score you must pay your bills on time.
30% of your credit score is determined by your debts. This includes how much money you owe to creditors, how many accounts you have opened that have balances, and the amount you currently have charged on those cards. The closer you are to maxing out your credit cards the lower your credit score.
You can ask for credit line increases or move money around on your cards to improve your credit utilization ratios.
The best course of action is to pay down all your cards and use less than 30% of the credit limit available.
15% of your credit score is determined by the length of your credit history. The longer you have had active accounts opened the better. Do not close old unused accounts. This will shorten your credit history and lower your score.
If you are not being charged any inactivity fees or annual fees on your older accounts then there is no need to close them. A good idea is to charge a tank of gas on your older cards and then pay it off at the end of the month. This will show your older cards as active and will be a positive for your FICO.
The older your credit history the better.
10% of your credit score is determined by new sources of credit. Lenders want to make sure you are not applying for several types of credit at the same time you are applying for a new home or auto loan. It is okay to apply for new lines of credit are credit cards but do not overdo it. The more you do, the riskier lenders perceive you and your credit score will drop as well.
If you don't need a new credit card or department store credit card then do not apply for it.
The final 10% of your credit score is determined by miscellaneous factors. This includes what types of credit you have on your credit report. Such as credit cards, car loans, lines of credit, and home loans. Lenders want to see a good mix of credit types on your credit report.
They want to see that you are responsible and can maintain long-term accounts such as a mortgage and short term accounts such as a car loan.
Other ways to fix a bad credit score include disputing negative items on your credit reports. It is estimated that up to 80% of all credit reports has errors on them.
It is a good idea to check your credit reports regularly to make sure there is no inaccuracies in your files.
You could also make sure all your accounts are being reported accurately.
You can also verify the information that should have fallen off your credit report has actually been removed.
The government has the free credit reports website so there is no excuse not to check your credit report at least once a year to make sure all the information being reported by the credit reporting bureaus is accurate.
Follow these steps we have outlined above and you can fix a bad credit score in a relatively short period of time. And then in 6 to 12 months from now you can apply for that mortgage or auto loan and get approved for a low rate.
