You know a sure fire way to improve your credit score?
Pay down your credit cards.
I know it’s not as easy as that, but read on.
Thirty percent of your FICO score is influenced by how much of your available credit you are using, both overall and by individual card.
Here’s how it works.
For simplicity’s sake we will assume you have no mortgages, student loans, or car loans. Let’s say you have four credit cards with limits of $5,000 each, or $20,000 in total.
Now let’s say that all four of these are maxed out, or close to it. You are using all of your available credit.
FICO doesn’t like this.
Ideally, the sweet spot is 30% of your overall credit. For the best possible score, you should be carrying a debt load of about $6,000 between these cards. In this situation, it actually behooves you to do the seemingly irresponsible thing and apply for more credit cards…provided you are only doing so to help your score and have no intention of using them!
FICO also looks at how much debt you are carrying by individual card. Again, this should be somewhere in the neighborhood of 30%. So in this case, where four cards are maxed, you are getting a one-two punch to your FICO score. Applying for more cards is not going to help in this scenario, but getting credit line increases will. This is provided that, once again, you don’t use the new credit.
But let’s be realistic for a second. If you are reading this because your credit score is bad, there’s not much of a chance the pre-approved new card offers are clogging up your mailbox. There’s also not much of a chance that your existing creditors are going to approve a credit increase.
I know it seems like a losing battle. In the case of bad credit, it really appears like the system is rigged to keep you down.
Most likely, you are barely managing to pay the monthly minimums on the cards. Add this to the compounded interest and it’s going to be years before you get anywhere near that 30%. If you’re still charging and/or getting late fees…well, forget about it.
Is hitting the lotto the only answer?
Well, no. There is another way you can at least clear up some space on your credit cards, and help your FICO ascend from the basement.
You can get a personal loan.
Your credit score will ALWAYS be a factor when looking for an unsecured personal loan from a reputable provider. Lenders who truly have no credit score requirement are often predatory “payday” loans that can charge APRs of over 1000%.
However, some online personal loan providers will allow for bad credit scores provided you meet other requirements. Income is important, obviously, as well as time employed and length of credit history.
Lending Club is a good place to start. The company takes scores as low as 600. Now you will most likely be paying on the high end of their rate range, but you must compare that to the average rates on all your cards now.
If you don’t know what your rates are -- and don’t feel stupid, because I didn’t either -- you can call your credit card provider or look in your statement. It’s usually on one of the last pages. You’ll see the current APR and also a separate APR for cash advances.
Even if the personal loan APR isn’t much better, consider that you’ll be consolidating a bunch of different payments into only one. That way, you will only have to remember once each month, and you’ll be doing the best thing possible to help increase your FICO score by clearing overburdened cards.
Being in a financial free-fall drains you on a daily basis, and can ruin your quality of life. I know what it feels like for the payments to always be late, to get the phone calls and to not even want to open a statement or log on to a website, for fear of finding out what nightmare awaits.
In these situations, we very often feel that the only solution possible is some injection of cash to magically appear, or to find another job with a commensurate leap in salary. I’m not saying these things can’t happen, but rather that, failing this, there are some things you can do right now, even if you don’t have the money.
All it takes is being proactive. The first step is to not be afraid to confront the financial mess you are in, and to accept it as reality.
For all credit types, take a look at our Top Ten Personal Loans to find the best offer for you.