Credit problems aren't easy or quick to fix, but there are things you can do that, in time, will dramatically improve your credit report and your credit score. The key to credit restoration is patience and understanding the FICO scoring model.
Pay Your Bills On Time
According to Fair Isaac, payment history accounts for 35% of a consumer's FICO score. That's a big number. Late payments can negatively affect your score. One or two payments beyond the 30 day mark won't kill your score, but late payments into the 60, 90 and 120 day range will drop your score dramatically. After that, the only thing that can repair it is to make payments on time. The older the late payment becomes, the less of an impact it has on your credit score. The longer you make your payments on time, the more your FICO score will improve, because the new history will offset the old.
Reduce Debt
A consumer's debt ratio makes up 30% of the FICO credit score. This number takes into account your available credit lines and how much of that credit line is used at any given time. The closer your are to the maximum limit on a credit card, the more of a negative impact it will have on your score. This is why maxing out a credit card causes a score to drop. This 30% also includes the amount of debt a consumer has in auto loans, mortgage debt and student loans. The more debt you have overall, the more risky you are to lenders, and your credit score will reflect that risk in the form of a lower number.
Get a Secured Credit Card
Once a credit score is damaged, traditional credit card issuers may decline your application because your score does not qualify you for a card. The solution in this case is to apply for a secured credit card. With a secured credit card, you place a deposit with the issuing bank. The bank then issues a credit card with a credit limit equal to the amount of your deposit. This card will function just like a regular Visa or MasterCard and will display as a credit card account on the credit report. You and the bank are the only ones that will know that it's secured. Deposits are placed in a savings account or CD. Some earn interest, but others do not. Check with the issuing bank for clarification on all details regarding a secured card. After a certain period of time, most banks will upgrade a secured card to a regular card and refund the deposit to the consumer. This varies from bank to bank, however. Paying this card on time will increase your credit score. Be careful though; 10% of your FICO score is devoted to new credit, but if you take on too much new credit at once, that's considered risky. It's a fine line; one that a consumer must walk carefully.
Limit credit inquiries
Credit inquiries are a part of the New Credit section of your credit score, which again is 10%. Having one or two inquires while applying for secured cards won't damage your score, but multiple inquiries within a short period of time will. The reason this affects your credit score is that FICO considers it an indicator of risk. People will often apply for more credit when they've maxed out their cards or find themselves in a financial bind. Only apply for credit if it's necessary. The exception to this rule is applying for a car loan or a mortgage. Multiple credit pulls for these loans are not counted negatively on the credit score if they occur within a short window of time: two weeks.
Maintain your length of credit
Don't close any old accounts. The longer your credit history, the higher your credit score will be. This also accounts for 10% of your FICO score. The length of your credit history is an average of how long all of your accounts have been open. Even if you open a new line of credit, closing an older account will shorten the average time of your accounts. You don't have to use the older credit cards once the payment history is current, simply keep them open. As the new accounts continue to age along with the older accounts, your credit score will improve.
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