How to rebuild poor credit legitimately
A low or poor credit score not only leaves a negative impact on one’s overall financial health, but also reduces the probabilities of acquiring a low-interest rate on loans. But the truth is that rebuilding bad credit takes a good amount of time. The slow process might often demotivate the person from proceeding further, and he or she tends to eventually give up.
Besides the conventional way, there are a few other legitimate tricks that can help you acquire a good credit score in a short time. But, honestly, that will require you to take an extreme jump. Here are a few options that you might want to consider based on the current circumstances.
1. Open a fresh credit card account
Contrary to the popular belief, opening a fresh credit card account when you have a poor credit score can be of huge help in increasing the overall available credit. Know that the percentage of the available credit you have spent also plays a key role in determining the credit score.
Now, lowering this percentage by intensifying the total available credit can literally boost the credit score in less time. However, this strategy might backfire sometimes because opening multiple new accounts can shorten the accounts’ average age and eventually, call for a poor credit score.
While the available credit in your account can tempt you to spend in excess on debts, not using the credit cards might also cause the company to close the inactive credit account.
Therefore, the best trick is to append the credit limits of your existing credit cards and pay off the existing debt. Also, ensure to put a freeze on the excess spending habits towards your credit card.
2. Clear the existing debts
Since a major percentage (30% or more) contributes to the debt that you owe while calculating the credit score, clearing off the existing debts does make sense. It doesn’t matter how much debt you owe. What matters is the difference between the money you owe and the credit limit you hold. This ratio is termed as “credit utilisation.”
To help you comprehend better, here is an example. Assume that person X has a credit limit of Rs.10,000 and has a balance of Rs.5,000. Then his/her credit utilisation will be 50%. However, for some reasons, if the person has maxed out the Rs.10,000 credit limit, then the utilisation automatically becomes 100%.
Though there are several theories related to the right credit utilisation levels, reliable sources and experts suggest holding a rate that does not exceed 30%. In short, one should not exceed an amount of Rs.3,000, if the credit limit is Rs.10,000.
Nevertheless, if the debts that you owe surpass the actual amount, then paying off the balances is one of the quickest ways to boost the credit score. A second job or freelancing can do a good help in the extra cash to pay off the debts.
3. Try negotiating the outstanding balances
Perhaps, the credit score recently took a deep dive and you have your bills in the debts collection. This sounds a little hard to fix but not impossible. Though you cannot erase your previous mistakes that are written in the credit reports, there is something that can be done to control the damage – just “settle them.”
“Settling them” means you can negotiate the debts that you owe. Try to talk to the respective person and have some amount of the debt negotiated. If you succeed in doing this, a big headache is already gone. But make sure that you get this discussion as a memorandum of agreement (or written document). If the negotiation succeeds, try paying some cash upfront so that the lender gains some trust in you.
4. Pay twice a month
You have to ditch the traditional way of paying only once in a month on time. You might feel that you are doing a terrific job by making proper payments, even if the credit card has maxed out. However, the case is different if you look from a different perspective.
Know that your creditors report balances to the respective credit bureaus only once in a month. Therefore, if you run a higher balance every month, this could make it appear as if you are overusing the credit.
Say, for instance, a person has a rewards credit card with a limit of Rs.10,000. Since it is a reward card, the chances of using the card will be frequent and in no time, the person might hit the limit. When the credit statement arrives, it will say that the respective person owes Rs.10,000 and he/she sends a check to repay this.
However, the problem is that the card issuer is more likely to report the statement of balance every month. This will make it seem that he/she has an outstanding balance of Rs.10,000 and a credit limit of Rs.10,000, meaning a 100% credit utilisation rate, which isn’t good for the credit score.
The above problem can be alleviated by breaking the payments of the credit card. You can make as many purchases you want with your credit card but while making the payments, do it two times a month instead of one. This will help lower the running balance.
5. Knock off the errors on your credit report
Rectifying any error on your credit report, which you feel shouldn’t have been there, is the best way to rebuild poor credit score, as this contributes about 5% of the total credit score. Once you acquire your credit reports, check if there are any errors.
Say, for example, a few payments must have been marked as “late,” even though you had paid them on time or before the due date. Or maybe there might have been negative information regarding a transaction or the listed details might be too old.
Once the errors in the credit reports are reported, the credit agencies or credit bureaus should dispute them within 30 working days. Once the errors are cleared, the credit score will improve greatly in some time.