By Eric | January 1, 2015
How To Fix Your Credit Score Fast Using Debt Ratios
If you want to know how to fix your credit score fast. we need to understand how our credit score is calculated and what factors are the most important. Most people believe that they have bad credit because they had a repo, foreclosure, medical bills or some other types of negative credit reporting to their credit report. That is partially true.
Actually there are several other factors that affect your FICO credit score. We’ll focus on the FICO (Fair Isaac Corporation) score because that’s the scoring model that most lenders throughout the United States use.
Here’s a breakdown of the FICO score.
35% Payment History
30% Amounts Owed
15% Average Age Of Accounts
10% Types Of Credit
With our payment history only being 35% of our credit score, you see how it would be possible to have a good credit history and still not have a good credit score. The 30% amounts owed is primarily referring to “revolving” credit or credit cards. If your credit cards are maxed out or you don’t have a credit card open, your credit score is suffering.
The next area is average age of accounts. That’s 15% of your credit score. If most of your credit is new, it’s holding your credit score back. That’s why people with 750 plus credit score generally have mortgages that have been open for several years or credit cards that have been open a long time.
10% Types of credit is referring to the type of account. The most common types are:
Mortgage – Home loan
Installment loans – Accounts that have a pre determined number of payments. Such as an auto loan or a personal loan.
Revolving accounts – These accounts do not have a pre determined number of payments and the balance can fluctuate. Credit cards are the most common example. Another is a home equity line of credit or HELOC.
If you don’t have an installment loan currently reporting, a revolving account currently reporting and a mortgage currently reporting, it’s holding your credit score back.
The next area is inquiries and that’s 10% of your credit. You don’t want to randomly apply for credit. Especially when you have bad credit. It’s only going to drag your credit score down further.
Now you have a foundation, let’s learn how to fix your credit score fast.
The biggest area is your past credit history. If you had credit problems in the past and have a lot of negative information reporting, there is hope. If the information is not accurate and verifiable, it has to be removed. When negative information is removed, your credit score will generally increase. I have a ton of articles and videos covering this. You can check them out here. Let’s focus on the other areas and how you can manipulate them to drastically increase your credit score.
If you have bad credit. you most likely are going to be able to run out and get a mortgage to help you credit score. And I don’t recommend going out and buying a car at a high interest rate to improve your credit either. High interest rates and getting in over our
head is what landed us in this predicament anyway. The one account that ANYONE can open regardless of credit is a credit card. Here’s the cool thing. It’s the most beneficial to your credit score.
You see, FICO looks at the amount owed (30% of your score) differently than amounts owed on other accounts. When someone buys a home or car, the account is “maxed” out in the beginning and slowly decreases over time. It wouldn’t make sense to penalize you because you buy a home or car. But a credit card….FICO loves to see low balances on credit cards. Keeping a low balance on your credit cards, shows that you can manage your money.
If you don’t have a credit card reporting, opening one will improve:
1) Your credit history 35% of your score. As you make payments, you are building credit history.
2) Debt ratios 30% of your score. If you keep your balance at 20% of the limit or less.
3) Types of credit. Which is 10% of your credit score.
How Using A Credit Card Can Help Fix Your Credit Score Fast.
This one account affects 75% of the factors that determine your credit score. That’s powerful! So how do you open a credit card with bad credit? One option is secured cards. This is a great option. A secured card is when you send in a deposit and that is your credit limit. Make sure it’s a secured card and not a pre paid card. A pre paid rd does not report to the credit reporting agencies and will not help your credit score. These generally start around $200.
The amount of the card is not important. The debt ratio is. Your debt ratio is determined by your balance in relation to the limit. If you have a $200 credit card and you owe $100, your debt ratio is 50% because you owe half. The key to getting the most out of this, is keeping your debt ratio less than 20%. So on that $200 card, 20% would be $40.
There are credit card companies that offer cards to people with bad credit. Many of these have extremely high interest rates and or have high fees. It’s common to see a card offer with a $300 limit and $160 in fees as soon as you receive the card. While these cards do not require a deposit, you would need to make a $100 payment just to get your debt ratio down to 20%. I suggest leaving these alone and going with a secured card.
There are also shopping clubs that offer credit lines. Companies like Finger Hut. These are good options too. Which option you go with isn’t important. Opening one right now is very important. So now you know how to fix your credit score fast, the sooner you start building good credit, the better. This step cannot be overlooked. Go ahead and do this now. In a few months, you’ll be glad you did.
Integrity Credit Solutions provides resources and information that is designed to help you with your credit. If you’re struggling with bad credit or need to fix your credit fast, don’t hesitate to give us a call. ICS has decades of experience providing credit repair and help people fix bad credit. (888) 556-7265