From mediocre to fair: how to boost your credit score

Open financing opportunities by improving your credit

If you have a bad credit score, you probably know that. And you would probably like to improve it.

It’s not that hard to increase your credit score; a few changes can make a big difference.

Wrong items, debt refunded – these can unnecessarily lower your score.

The first step in moving from poor credit to fair credit is to find out why your credit score is low and how to improve it.

Thousands of mortgage buyers do it daily. You can be one of them.

What is the difference between bad credit and fair credit?

There is no standard definition of fair credit or bad credit, but there are some commonly used ranges.

“Bad credit” generally means having a FICO score below 620 – the level at which many lenders set their minimum acceptable score. “Fair credit” is often defined as 620 to 679.

Currently, the average FICO score in the United States is 685, according to Governance magazine, which is slightly above the “fair” range.

The high cost of low FICO scores

Low or subprime credit scores can suck a lot of money out of your bank account. When you have fair credit, you pay much less in loan fees and interest charges than with bad credit.

An online credit tool says a 37-year-old woman California would pay $131,000 more in finance charges over their lifetime with bad credit than with fair credit. That’s 131,000 reasons to raise your credit score.

The downsides don’t end there, however. People with low FICO scores struggle with:

  • Rental: Landlords check your credit before deciding to rent to you, and they may refuse your request or increase your deposit
  • Get insurance: In most states, insurers are allowed to consider your credit score when setting your rate.
  • Employment: employers can check your credit before deciding to hire you

How bad credit gets to good people

Many factors contribute to low FICO scores – examples include a short or limited credit history (aka “light folder”), high account balances, too many accounts or too many credit inquiries (inquiries).

However, the most damaging things in your file are probably in your history – missing or late payments. Here are the five most common reasons for low credit scores, according to FICO:

  • Serious delinquency
  • Serious delinquency with public record or deposited collection
  • Time since delinquency too recent
  • Number of overdue accounts
  • The ratio of balances to credit limits on revolving accounts is too high

Each scenario is reversible, but some take longer to resolve than others.

How to increase your credit score

Note that four of the top five reasons for low credit scores contain the word “delinquency.” The fifth relates to the amount of available credit you actually use – your “utilization rate”.

The utilization rate is the comparison between your available credit and the amount borrowed.

You have a ratio of 50% if you have $10,000 of available credit and you have charged $5,000. Keep your utilization rate below 30% for better scores, says credit bureau Experian.

If your credit score is “bad” for any of the reasons mentioned above, there’s good news: they can be fixed and you may be able to go from bad to fair in just a few months.

Fix your credit history

On-time payments are the only way to overcome a bad history and boost your credit. For the credit bureaus, “on time” means within 30 days of the due date.

If you have trouble remembering to pay your bills, try setting up automatic payments from your checking account so you don’t miss a payment.

If you have fairly recent collection accounts (less than two years old), contact the agency to pay them – and try to get them to agree to remove the derogatory entry from your credit file. They may tell you they can’t do this, but in fact they can.

Old collections don’t do as much damage as the newer ones, and in fact paying for them can move them into the present and drop your credit score.

Again, the best way to pay them off and have a positive impact on your score is to persuade both the collection agency and the original creditor to remove the negative information from your credit report in exchange for your full payment.

too much debt

The fifth main cause of low credit scores is overusing your available credit.

That’s a big deal, because maxing out lines of credit is a red flag for creditors — your spending habits aren’t sustainable. Keep spending more than you earn and you risk defaulting or declaring bankruptcy.

On average, people with credit scores below 620 use more than 70% of their available credit, while those with fair credit use 40-70%. In general, the lower your usage, the better your score.

If you have $2,000 of available credit and you have a balance of $1,750, your usage is very high — $1,750 divided by $2,000 = 87.5%. Your goal should be to pay it off at $1,200 or less.

How to reduce your use

You may be able to quickly reduce your utilization rate by consolidating your debt with a personal loan or home equity loan – replacing credit card balances with a new installment account or mortgage.

However, this strategy fails about 75% of the time because most people with credit problems keep spending too much. Only try this if you to know that you will repay your consolidation loan each month on time and that you will have no balance left on your credit cards.

The most reliable method is to stop charging your cards and pay as much as you can afford each month, without relying on that minimum payment.

You can increase your credit score

Bad credit usually doesn’t happen overnight, nor does it disappear overnight. But you can increase your credit score from poor to average in a matter of months if you put in the effort.

Plan to motivate yourself by monitoring your credit score and accounts as you take control. Watching your FICO score increase month after month feels good.

What are today’s fair mortgage rates?

Mortgage rates for fair credit are not as good as those for people with good or excellent credit. However, the current economic situation has made these loans very affordable.

The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.