Tristan Powys (Credit Counsellor) @ Lucid Living
Trying to improve your credit score can seem impossible when lenders are fearful and you’re strapped for excess cash. But don’t give up hope.
“Focus on where you are right now and do what you can with what you have,” said Adv Randolph Samuel, CEO of the Credit Foundation of South Africa, a Not-For-Profit organisation that aims to educate South African’s on smarter money management.
You can make progress—even on old, negative debt—and start to rebuild your credit score and therefore, your future.
Here’s how to do it step-by-step:
Work with the credit bureaus.
Errors happen with debts paid after they’ve gone to collection agents. The credit bureaus might need to update the debt as “paid in full” instead of deeming it “outstanding.”
Other times credit bureaus fail to take off old defaults or judgments, which should only stay on your credit record for two to five years.
Review your credit report regularly and challenge any inaccurate or out dated information. No less than 3 research studies in the U.S have revealed that up to 70% of credit reports have errors. In 25% of those cases, the errors are so serious that they prevent a consumer from accessing finance, said Samuel.
Don’t think you can wave a magic wand and make your bad credit history disappear, said Samuel. If you have outstanding debts, you need to re-pay them. Credit Counselling companies are effective in negotiating with creditors and lowering the principle you owe.
Outstanding debts can be reported to the credit bureau as “not paid,” “paid in full” or “in dispute,” and all impact differently on your credit score.
For example, if you make a payment to the collection agency, you might be able to get the status changed to “paid in full” which reflects better on your credit score than “not paid”.
Using credit cards.
Credit utilization, particularly on credit cards, has a major influence on your credit score. If your limit is R5000, don’t use up R4500, which will look like you’re using 90 percent of your available credit and put another ding on your credit score. Credit utilization of below 30% is welcomed by banks and indicates that you are using your credit responsibly. anything above 70% is viewed negatively.
If you’re four to five months behind on your credit cards, a Credit Counselor can also negotiate the principal on the debt, said Samuel. Reaching a settlement won’t improve you credit score per se, but it will help you get more affordable monthly instalment and mean that you pay off the outstanding balance quicker – which in the medium term will improve your credit score.
Start paying your bills on time.
This makes a huge difference on your credit score, and has become even more impactful in the last two years, said Samuel. “It’s one of the most predictive things of whether someone will pay their debt,” he said.
The senior vice president of research for VantageScore, a credit scoring firm, told Time’s Moneyland that paying your bills on time makes a 50-to-60 point difference on your credit score.
Don’t worry as much about old debt.
The older the debt, the less it affects your credit score.
So if you have two items on record, both of which you’d like to dispute, focus on fixing the newer item. That’s the one that’s weighing you down more.
The same applies to other black marks like defaults and judgments.
Try not to apply for too much credit at once.
Each hard inquiry, or pull of your credit report by lenders, counts against your credit score.
So if you plan on applying for a loan, go for one or two you think you’ll qualify for instead of taking the shotgun approach.
Samuel recommended discussing your needs with a Credit Counselor, who can advise what kinds of loans and credit cards you might be eligible for, depending on your credit history.
Lower your utilization rate.
You should only be using about 30% of the credit available to you, said Samuel. Using too much will be a big knock against your credit score.
He recommended either paying down your debts or increasing your available credit to improve your credit utilization.
Keep in mind, applying for additional credit will result in a hard inquiry and slightly lower your credit score, so don’t apply for too much credit from many sources at once.
And if you choose to pay off your debt, pay off the cards with the highest interest rates along with the ones you’ve already maxed out.
Letting time pass while you make your payments on time is your best bet for upping your credit score, said Samuel.