What is a low credit score?
If your credit score
is hovering around 650 FICO, you're in good company. The average FICO credit score
in the fourth quarter of 2015 was at an all-time high of 695, so while 650 is
below average, it still ranks in the “fair” category. Still, while it's a far cry
from the “bad” credit range of 600 FICO and below, a 650 FICO or even 700 FICO score isn't enough to
earn you all the plum benefits of a really good or even excellent score, so
it's definitely worth your while to do what you can to earn a few more points
and rise to that next level – from a “fair” score to a “good” one.
If your credit score
is low – around 500 FICO or 550 FICO, in fact – you need to address it right away. While there are plenty of others in
the same boat, that probably doesn't make you feel a whole lot better. Your low FICO credit score means decisions like buying a car or a home will have to wait, because
lenders think you're just too much of a risk. It also means:
- you can wind up paying more for insurance;
- lose out on that new apartment;
- you miss out on job opportunities that could give you
a better future;
- plus, if an emergency pops up and you need a personal
loan, you'll never qualify for low rates - instead, the most you can
hope for are high-interest subprime or payday loans with restrictive fees
and huge penalties.
Why do you need a good or fair credit score?
- You'll pay higher interest: With a score of 650 FICO or 675 FICO, any
loans or cards you do qualify for will probably have fairly high interest
rates, and your cards may require annual fees.
- You may have trouble getting major loans: the chances
of getting a mortgage are pretty slim, and if you need a new car, any loan
you qualify for will likely have a pretty high rate, and that can boost
the “true” cost of your new car by thousands of dollars.
- Your refinancing dreams may need to be put on hold: As
with a conventional “new home” mortgage, getting a refinancing loan is
going to be much more difficult, and if you do manage to qualify, the
rates you pay will be higher – and that means you could end up paying tens
of thousands of dollars in extra interest over the life of your loan.
- Your insurance rates may be higher: Insurance companies
are in the “risk” business, and they often use the FICO score to decide if
you're a good or a bad risk when it comes to providing you with insurance.
Lower credit scores – yes, even those that are considered “fair” - can
jack up your premiums significantly.
- Your job search could be affected: Fair or not, plenty
of employers use your credit score as an indicator of the type of employee
you're going to be, with those with lower scores generally considered
riskier when it comes to making new hires.
- You might not get that great apartment you've been
considering: Just like lenders and insurance companies, landlords consider
risk when it comes to handing over the keys to their properties. Apartment
complexes and private landlords almost always use credit scores to decide
if they want to rent to you or to someone with a better risk profile.
What goes into the FICO score?
There are five primary
components to the FICO score, and each one is weighted differently when it
comes to determining your score. Here's a quick rundown of the “essential five”
and what you can do to improve your habits and your score in each area:
This is the biggie,
accounting for a little more than a third of your score. All you have to do to
score big here is pay on time, every time. It may sound simple, but even if you
mess up a couple times and wind up paying late, it can have a major impact on
your score, so being vigilant is essential. Plus, payment history doesn't just
include your history of paying credit cards and other loans – it also includes
any accounts that go to collections as well as any court decisions rendered
against you – like, say, if you have a foreclosure or you don't pay your credit
bill for a long, long time and the credit card company pursues payment in
court. Unfortunately, not only is payment history the biggest factor used in
determining your score, it's also the one that takes the longest to repair.
Only time can improve your payment history significantly, which means you need some
techniques to keep your payments on time and on track.
How to improve:
- Build an emergency fund. Of course, the most obvious
thing to do here is pay all your bills on time. Duh. But while it sounds
obvious, it's not always that easy. We've all had those unexpected
expenses that cause us to overextend ourselves from time to time, and if
you're living near the edge of your credit limits, it's even easier to
start making a late payment here and there. If you can, try to set aside a
little money each week to fund an emergency account so you can pay for
unexpected expenses without turning to your credit card. Even $10 a week
is a start. Have it set aside with direct deposit from your check so you
won't even know it's missing.
- Speaking of automatic deposit, if your bill has an
autopay option, use it. By having your monthly payments deducted
automatically from your checking account, you won't have to worry about
being late. Just be sure you have enough money in your account to cover
your bills when the deduction occurs, or you could be hit with overdraft
This is the second
biggest factor, accounting for about 30 percent of your score. Amounts owing
refers to how much you owe on each of your outstanding loans, especially with
regard to the credit limit; that means if you have a card with a $10,000 limit
and you owe $1,000 on it (10 percent), it won't have as much impact on your
score as if you have $1,000 owing on a card with a $2,000 credit limit (50
percent). Again, the key to improving in this area is obvious: Pay down your
debts. But, like payment history, just because something sounds
doesn't mean it is
easy to implement.
How to improve:
- Try to put any extra money you have toward paying down
your cards (but try NOT to touch your emergency fund; if that's gone, you
may wind up using credit more often, which means you could end up carrying
an even bigger balance). The goal is to get your credit usage down to
around 20 percent of your available credit on each card. (Well, OK, your
actual goal is to pay off your credit cards entirely, but 20 percent
sounds a lot less daunting.) Some people decide to pay down the card with
the smallest balance first – seeing one card reach 20 percent usage or
less can provide powerful motivation to keep going – while others choose
to pay down the card with the highest interest rate to save more money.
The choice is yours, but whichever approach you use, there's one more
thing you can do to increase the impact of our pay-down strategy by using
- The “snowball” method. The snowball method uses the
analogy of a snowball that picks up more and more snow as it gathers
momentum rolling down a hill, with the hill representing your decreasing
remaining balances on your credit cards. In practice, what it means is this:
You choose a card to pay off, and you make a note of the minimum amount
due each month – say it's $300. You pay that $300 every month as well as
throwing any spare cash at the balance until you pay off your card. Once
you start paying down your balance, something happens: Your minimum amount
due will also decrease. That's how credit card companies extend the amount
of time it takes you to pay back your debts – and increase the amount of
interest they're earning. But instead of adjusting your payment down along
with that lower minimum amount due, you keep paying your original minimum
amount due – $300 – which means you'll reach your goal faster without
changing the impact on your budget. Yay! You reached your goal, and now
you have an extra $300 to spend each month, right? Wrong. Once you reach
your goal with that card, you take that $300 you had been paying on that
card to the next card in line for rapid repayment. Say you've been paying
the minimum amount due of $200 each month on card #2; the added $300 means
you're now paying it down by $500 so you'll see your balance shrink much
more quickly. And that's the snowball method.
- Get another job. One of the fastest ways to pay down
your balances is to get a part-time job and devote the ENTIRE paycheck to
paying down your balances. Willpower is critical here, as in every aspect
of paying down debt. Do NOT be tempted to take that “extra” income to
splurge on something, and be careful it doesn't get absorbed into every
day spending. Remember: Autopay is your friend. If the cash comes out of
your account to pay bills automatically before you ever get a chance to
hold it in your hand, it can be a lot easier to stay on track.
Length of credit history
This factor accounts
for about 15 percent of your score, and it's a good thing because there's
really no way to improve it except by getting older and keeping your accounts
How to improve:
- As noted, the longer you have credit, the more this
factor will improve. The length of credit history is based on an average
age of all your accounts, so if you start closing old accounts (or have
them closed for non-payment) or if you take out a new account, this factor
is negatively affected. The best strategy here is to avoid closing your
oldest accounts and avoid taking out a lot of new credit lines (which you
should do anyway if you're trying to boost your credit score).
- The length of time since you last used an account can
also factor in here, so if you have any cards sitting idle, you might want
to charge a VERY SMALL amount on them now and then so they remain active.
Otherwise, the account may wind up being closed.
Types of credit
This factor “only”
accounts for about 10 percent of your FICO score, and what it reflects is your
ability to secure different types of credit or loans – home loans, car loans,
student debt loans, personal loans, credit cards – each represents a different
category of credit, and FICO thinks that by having different types of credit,
it demonstrates you're a better risk.
How to improve:
- Just live life. Over time, you'll probably amass
different types of loans. Do NOT be tempted to take out a loan in a
different category simply to improve in this area. The interest you'd wind
up paying would far outweigh any potential modest benefit you might see in
your score, and having another loan would count against you when
calculating total amounts owing, so any benefit could wind up being
canceled out anyway.
Like types of credit,
new credit accounts for about 10 percent of your score. Generally speaking,
FICO looks at how you shop for credit to help determine your relative risk
level: If you open a lot of accounts or take out a lot of loans within a short
period of time, it can make you look desperate for cash, and in the eyes of
FICO, that's not good. “Serial” applications for loans and credit can cause
your score to drop – even a single application can cause a drop of a few
points. The good news is, as long as you pay your accounts on time and keep
your balances low in relation to the credit line, the points will come back,
usually within a few months.
How to improve:
- If you're trying to boost your credit score, the best
way to avoid having your account dinged and losing more points is to stop
taking out new credit. Right now, your focus should be on improving your
payment habits and paying down existing accounts, not taking out new
Undoing what's been done
Before beginning any
journey, you have to know where you're going and you have to have a plan to get
there. The “knowing where you're going” part is easy – your ultimate
“destination” is a better credit score. How to get there is a little trickier,
but once you understand some basics, you'll be surprised how easy your journey
Making a map to your future
Of course, before you
get started, you need to know where you are right now so you
can make a plan – a map – that's designed just for you. To get started, all it
takes are two important steps:
- Gather all your bills together
- Order copies of your credit reports.
In the medical world,
this is known as “triage” - finding out specifically what's wrong, deciding
what needs to be done, and then prioritizing all those tasks so you can rebuild
your credit over time, as quickly as possible.
Your bills and your
credit report let you see where you are in black and white. If you've just been
throwing your bills away, STOP
. Save any that arrive and put them
in your “I CAN DO THIS” credit repair file or box, or wherever you're going to
keep your bills and credit reports while you rebuild your score.
Ordering credit reports is simple - and free!
In the meantime, you
can see a lot of your bills right on your credit reports, including:
- other types of unsecured loans and consumer loans
Plus, you can get a
free credit report every 12 months from the three major credit bureaus –
Equifax, Experian and TransUnion – just by visiting www.AnnualCreditReport.com
. You can order all three at once, or spread them out – one every
four months – during the course of the year once you're in the monitoring
But for triage, you're
going to want to get all three of them at one time. Why? Because each agency
can report different items, so if you only order one, you won't have a complete
picture of the factors that are contributing to your credit score. Once you get
your reports, you'll want to review them very closely and look for errors – any
errors – that need to be fixed. You can do that online, too, at the bureaus'
websites, and since the correction process can take one or two billing cycles,
the sooner you get started making any needed corrections, the better.
Your credit report: A snapshot of bad habits, and good ones too
In addition to making
sure your reports are as accurate as possible and seeing which accounts are in
trouble, there's another important reason for getting your credit reports right
away: Having your credit history condensed to a few pages can help you see
and understand more clearly the poor financial decisions you've made
and their consequences on your life.
That doesn't mean you
should feel guilty about those mistakes – not at all! Learning to handle
finances isn't easy, and the school systems don't provide us with a lot of
tools, if any, before we graduate. Instead, it should make you feel empowered –
maybe even a little bit angry – and ready to take back control of your
financial future. After you're through looking for errors, make a list of all
your bad habits that landed you that 550 score – overlimit spending, late
payments, having too many consumer loans or unsecured loans like credit cards,
letting accounts go to collections, foreclosures, and just plain spending more
than you earn.
Now, it's time for action!
Once you know what's
on your report, you need to know what you can do to improve the negative
entries and to supplement the positives. You can do it! Just take one step at a
First, make a list.
Knowing where you are
financially begins with writing down every consumer loan, unsecured loan,
installment loan, personal loan and any other type of loan or account with a
balance owing. Use a notebook to write everything down and keep it
organized, or use a spreadsheet if it's easier for you. Here's what to
- the name of the creditor;
- the type of debt - credit card, car loan, etc.;
- the total amount you owe on each account;
- your monthly payment if the debt is an installment
- for installment loans, include the amount due right
now, including any fees or penalties;
- whether or not the account is late – and if so, how
- the interest rate you're paying;
- whether the bill is poised to go to collections;
- the phone number and email address of the account;
- any other important information about the account.
Once you've got your
list completed, it may look bleak, but don't dwell on it; you've got this, and
you can take the steps needed to turn all of this mess around – and it's going
to be easier than you think.
Next, you need to do
the same sort of triage for your finances. That means you need to know how much
you're bringing in each month and how much you're paying toward housing,
utilities and other items. You don't need to go into nitty-gritty details, but
having a ballpark figure will help when you move on to the next step, which is
Setting up a repayment plan
This is where it gets
a little more complicated – but just a little – because you have some decisions
to make. Different debts may require different repayment schedules, so you're
going to need to contact your creditors and find out what kinds of payment
arrangements you can make. Is this a fun process? No, but just like going to
the dentist for a root canal, it has to be done, and after a little bit of
discomfort, you'll be in much better shape. And if you don't do it, your account
will go to collections or worse – court – and you'll be in much worse shape. So
make the decision right now to do it and get it over with. Once you're done,
you'll feel a lot better because you will be more in control of your
own life and your own future.
- Don't sweat it: A
lot of people dread the thought of calling creditors, but it's really not
nearly as bad as all that. After all, most creditors and collections
agencies are used to setting up payment plans, so in most cases, a request
to pay over time isn't going to result in a batted eyelash. Even lump-sum
debts like cable bills, phone bills, utilities and medical bills can be
paid over time in payment plans. After all, these folks want their money,
and if the only way they can get it is over time, in most cases they'll
take that option over the protracted collections and court process any
- Know before you call: Before
picking up the phone, you'll need to have a rough idea of what your income
is after necessary bills, because while some creditors will tell you what
your bottom-most limit is for repaying each month, others may ask what you
can afford to pay each month to help them establish your plan. If you say
“I don't know” or if you overestimate, you could wind up with a plan
that's difficult to pay back. Is there an alternative to calling each and
every creditor? Yes – it's called a debt consolidation loan, and you can
read more about it in the next section.
The two-job shuffle: Is it right for you?
That's one way to
start paying more on your bills and provide some breathing room in your budget.
The second way is to take on another job – and that can be a double-edged
sword. Getting a second job can provide you with some much-needed income for
debt repayment – as long as you devote the entire check to the debts. But when
you're already faced with paying down a large amount of debt and taking other
steps to repair your credit, getting another job right away could be enough to
send you back into the overspending spiral. Try the budgeting route first, and
once you've got that under way, revisit the second job idea if it makes sense.
Debt Consolidation Loans: The Secret Weapon
Right about now, it's
probably starting to look like a lot of work, and it is - but it's all doable;
no "rocket science" involved. But if you want an even easier solution
to get you back on the right track, there is one more thing you can
do, and it's a biggie: Consider a debt consolidation loan.
loans look at all your debts and roll them into one loan with a single interest
rate, so you can pay back your creditors right away for a major impact on your
score. Shop around with www.Carpe.com/loans/debt-consolidation before choosing one option. These loans offer plenty of attractive benefits for consumers:
- One monthly payment means your entire repayment
plan just got a whole lot easier. Just one date to keep track of instead
- You don't have to worry about missing a payment date
and getting another red mark on your credit report – just one payment each
month is all you'll have to think about.
- If you really want to make it simple, you can have that
payment automatically deducted form your account for even more peace of
- Applying for a debt consolidation loan means you don't
need to contact your creditors to set up payment plans, because your new loan
can pay them of in full.
- Most debt consolidation loans have low rates compared
to the rates you're paying on your overdue credit cards.
- You can apply for debt consolidation loans online in
your own home. What could be easier?
In fact, with so many
benefits, you might want to explore this option before you even look at cutting
back, just to give you the “jump-start” you need to start feeling hopeful about
your finances and your credit. Once you have your loan in place, you can – and
should – still look for ways to cut expenses – and you can divert your extra
cash to building an emergency fund so you can avoid the credit trap in the
So how long will this take?
Your credit score
didn't get where it is over night, and getting it where you want it to be isn't
going to be an instant process, either. Plan on seeing some real upward
movement in your score within just a few payment cycles, especially if you opt
for the debt consolidation route – and don't use your repaid credit cards to
rack up more debt.
Humans, like all
animals, respond to positive reinforcement, so you might want to consider
subscribing to a credit monitoring service that offers frequent score updates.
Click above to find out which one works best for you.
What about debt settlement?
Lots of people wonder
if debt settlement is a good option, and while on the surface, settling your debts
for less than you owe may seem like a good deal, in fact, it can wind up doing
serious, long-term damage to your credit. Here's what a lot of companies don't
- Debt settlements show up on your credit report, often
as “chargeoffs,” which can have huge consequences to your credit score for
as long as seven years.
- Most debt settlement companies charge big fees for
their services – sometimes thousands of dollars.
- Many companies “front load” their fees, meaning your
first several months of payments could go to paying those fees rather than
paying down your debts; in the meantime, late fees and penalties can
continue to mount up with your creditors – and don't think your bad
behavior won't be reported to the credit bureaus.
- Plus, you may actually wind up owing taxes on the
amount of debt that was forgiven.
Psych yourself out - in a good way
And there's another
important reason to avoid debt settlement: Paying back your own debts without
resorting to partial payments through debt reduction and chargeoffs has powerful
psychological advantages. When you pay back your own debts through a plan
you devise, either over time or with a debt consolidation loan, you have that
pride that comes from knowing you're in control, and you have the skills to
take responsibility for your actions and turn your bad finances around all on
your own. That's a benefit that can have amazing effects on the rest of your
life, boosting your confidence and helping you feel more positive about your
ability to handle other complex situations that may come your way. That's a
benefit you can't put a value on, and it's one a lot of people tend to
Finally, we come to the “D” word.
And by that, we mean
Discipline is huge in
life – it's discipline that helped you learn how to walk, made you go to
school, go to work – even brush your teeth. In fact, nearly every habit you've
learned is based on discipline; most of those habits are so routine, you don't
even think twice about doing them.
When it comes to
having healthy finances, you need discipline too. In fact, discipline is
critical in helping ensure you don't get back into the same downward spiral of
overspending, overcharging and cringing when the phone rings or the mail is
delivered. Once you have your repayment plan in place – whether that means
doing it yourself over the long haul or opting for the once-a-month convenience
of a debt consolidation loan – you still need to cultivate the smart steps like
setting a budget or spending plan, building up an emergency fund and learning
to live life a little “smaller” and a little simpler. It's good for your
finances, it's good for your future, and it's even good for your health.
Right now, though, you
need to reach deep and channel all your energies into taking these first critical
steps to get your credit back where it should be:
Your 8-Step Plan to a Higher Credit Score and Better Financial
- Make the decision to take control of your
finances today, right NOW. (Boom – you just completed the most
- Order your credit reports and gather your bills.
- Make a list of your debts and understand the errors
that got you to this point – then make a commitment to practice better
- Look into consolidation for a convenient solution that
can have a big impact on your score.
- Identify areas to cut back on spending or bring in more
- Avoid debt settlement at all costs.
- Subscribe to a credit monitoring service.
- Continue practicing wise spending habits.
That's it. Eight steps
to a better financial future, a higher credit score and better financial
opportunities, including those low rates you've been longing for. And it all
starts with the decision you make right now. So get moving! You CAN
it, and the sooner you start, the sooner you'll reach your destination. Your
better, brighter future is just a few months away.