The truth is, there is lots of conflicting information about how to improve your credit score. You probably know this already. A simple google search will prove that all the “experts” have their own opinions about how to “quickly and easily improve your credit score.” But you know me, I don’t really care much for blindly following advice from experts no matter how established they may be. I like to go directly to the source to clear up any confusion.
So, that brings us to our conversation today. I know this business about credit scores can be confusing and frustrating so let’s get to the heart of the matter and find out the truth about what you can do to boldly boost your credit score.
Secret 1: There is A Method to the Credit Madness
There are several formulas used to calculate the multiple credit scores that exist. Most of those formula rely heavily on these 5 factors. Each factor has a weighted contribution in determining your score:
Payment History (35%): Do you ever miss payments? If so, the longer you are late the worse it impacts your credit score. Late payments are typically reported after 30 days. 31 days late is bad. 60 days late is worse. Over 90 days is a total credit score tragedy!
How much you owe (30%): This category consists of many different factors. How much do you owe in total? How many accounts do you have? Are you using 30% or less of your available credit? Honestly, I can’t imagine how one category can account for so many things!
Length of credit history (15%): The longer you’ve had credit (and have been using it wisely!) the better. This demonstrates that you have a history to prove your credit worthiness. Without it, creditors cannot vouch for whether or not you are likely to pay them back.
Types of Credit (10%): Do you have a proper mix of credit accounts? This includes credit cards, installment loans, home loans, and more.
New Credit and Inquiries (10%): New credit inquiries and accounts can adversely impact your credit. FICO’s behavioral research suggests that opening many accounts at once could present greater risk.
Secret 2: Paying off Accounts That Have Gone to Collections Can Help Your Score
Before, it was pretty much pointless to pay off accounts once they went into collections. The fact that the account ever went into collections in the first place was enough to ruin you for 7 years.
I am sure you can imagine what happened. When people found out that paying off debt in collections had little to no impact on their credit scores… they stopped paying. Obviously, this did not benefit anyone so FICO finally changed things. The new credit score calculation will bypass collection accounts that have been paid in full. Yay!!
However, this is not necessarily true for EVERY credit score.
Secret 3: Medical Bills Hurt Your Score Less Than Other Bills
Many of my clients have medical bills that they are working to pay off. Understanding that all debt is not created equal is extremely valuable when determining which debts to pay off first. Medical bills should be at the bottom of your list.
The revised FICO calculation does not weigh the negative impact of medical bills the same as other types of debt, which makes sense because medical debt is rarely taken on voluntarily and can often be unexpected and particularly burdensome. By lessening the impact of medical bills new credit score calculations will focus more on debt within the borrower's sphere of control.
Hopefully, uncovering these three truths have demystified the credit restoration process for you. And I assure these are not just opinions that I have picked up from different articles. This information comes directly from the source and from other credible sources when necessary. (see below for references)
I know, I know, talking about credit isn’t any fun. But it is necessary. This information will equip with the tools you need to get a better credit score and create more financial possibilities in your life. As we part ways at the close of this article, remember these words: Use your credit wisely. Always for good and never for evil!
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