In today’s economy, credit guidelines are tighter and stricter than ever. Credit scoring models have changed, causing scores to drop, leaving those struggling with low credit ratings out in the cold. If you already had a higher credit score before the economic crisis, you may now find that your score is no longer looked at as favorably as it once was. However, it is much worse for those who may have been working to improve their bad credit and are now feeling the strain of trying to obtain new credit with such low scores.
In the past, you could find several lenders who would be willing to extend a home loan to you if you had a credit score of 580. Now, a 580 score is considered to be bad credit and the overall minimum requirement across the board is a 620 for you to even be taken seriously. Credit card companies are lowering credit limits and raising interest rates left and right, which doesn’t help the person who’s been trying to work on improving their bad credit.
Despite this recent road block to credit recovery, there are a few things that you can focus on to avoid making your bad credit worse.
Do NOT Close Your Credit Card Account After You Pay It Off
With credit card companies now choosing to raise interest rates to high levels, you may be thinking, “As soon as I pay this card off I am done with this bank and I’m closing my account!” If you’ve received notification in the mail saying your credit card interest rate has been changed to 29.99% that is a completely understandable reaction. However, closing your account will only exacerbate your bad credit situation. By doing so, you raise your debt-to-income ratio. You want to have as much usable balance as possible so when lenders pull your credit report, it doesn’t appear as though you are drowning in debt with barely enough income to cover it all. So, as much as it pains you to have any affiliation with the bank that just raised your interest rate sky high, it’s best to pay off the total balance on your card and leave it open.
Paying Off Credit Card Balances, then Never Using the Card
Another tactic credit card companies are using is closing accounts due to inactivity. You worked hard, paid on time every month, and finally got your credit card balance down to zero — kudos to you. Now, since you know you need to keep the account open, all you want to do is cut up that card and never touch the account so you can continue on your path to improving your bad credit. Unfortunately, this can backfire when the credit card company closes your account because you haven’t used your credit card in the last 6 months. Instead, keep the card in a safe place in your house, to avoid using it. Then, every few months buy something small and pay it off immediately. That way the card shows usage and you will be able to keep that available balance on your account, in turn helping to improve your credit rating. Just make sure you make only ONE small purchase and pay it off as soon as you receive your next statement.
Paying the Minimum Amount Due on Your Accounts
This one is an oldie, but goodie. The negative effects of paying only the minimum balance on your credit accounts has little to do the current economic situation and everything to do with simply holding yourself back from getting out of debt. Yes, you’ve paid the balance due and you’ve paid it on time every month. Paying bills on time is the number one thing you can do to improve a bad credit score. Nevertheless, with sky-high interest rates the last thing you want to do is pay the minimum balance on your account every month. The only thing you are doing is drawing out the time it will take to pay off your debit and inevitably paying hundreds, even thousands more to interest. If you have a lot of debt, start with your highest-rate credit card or line of credit and pay it down first, then move into your next high-interest rate account and pay that down. Put as much extra money as you can manage towards paying higher than the minimum amount due. It may seem like a downer pouring extra money you could be spending on a night out into your credit card bill, but you will pay it off much sooner (and it will be much cheaper) while increasing your credit rating more rapidly by paying over your minimum amount due.
Avoiding these 3 credit snares will aid you in improving your bad credit in a down economy. With stricter rules and less approvals, it may seem like a hopeless situation. However, you can ride the tide and navigate through this time by keeping a close eye on your credit report and committing to pay your debt down as quickly as possible before the credit card companies can do any real harm to your line of attack towards bad credit recovery.
Sources: Personal Experience and Knowledge