The Better Credit Blog

One of the first steps I recommend when repairing credit is to pay down any credit accounts where the balance is more than 25% of the account’s credit limit. When your credit score is calculated, substantial consideration is taken on a simple calculation. This calculation is called your “utilization”. It simply means, “How much of your total available credit are you currently using?” In other words, “Is this person spending money without keeping in mind it must be paid back?” Utilization is a huge factor when a credit score is calculated.

Two things are taken into consideration in regards to utilization when your credit score is calculated. First, your overall utilization. This is calculated by adding together the balances of all of your revolving accounts, and then adding together all of the credit limits. Then divide the balance by the limit. Use my credit card balance to limit ratio calculator if you are shy in trusting your own arithmetic (like myself).

Overall Utilization Example

• Credit Card #1 — Balance: $300 Limit: $500
• Credit Card #2 — Balance: $100 Limit: $300
• Credit Card #3 — Balance: $500 Limit: $1000
• Total balance: $900 Total credit limit: $1800
• Utilization = $900 / $1800 = 50% Total revolving utilization

Therefore, as you can see, a credit card with a $0 balance has 100% utilization.

In addition to your overall credit utilization, individual credit account utilization is also taken into account. This basically means that if you have ANY individual account where the balance is over 25% of the credit limit, it is likely hurting your credit. Therefore, even if your overall credit utilization is under 25%, if any one of those accounts have a balance over 25%, your credit score is affected.

It’s about ratio, not actual numbers

I have been asked if the credit limit dollar amount matters. Specifically, if one has a credit card with a credit limit of $200, and every month it’s reported that this person uses 75% of the available credit, does the same (as previously stated) apply. Logic may tells us that it shouldn’t apply because it’s likely that this person can easily pay off a $200 balance every month. However, utilization does apply –the limit does not matter. If you have a credit card with a $200 credit limit, spending over $50 will hurt your credit score.

When you are repairing or building credit, it’s good to have a credit card even if the credit limit is low. However, as you begin to build credit, it is in your best interest to request credit limit increases when the time is appropriate. Remember: keep your utilization as low as possible –preferably at or around 25%.

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During the past week I have written an array of articles that outline the mistakes I made when I first began the process of fixing my bad credit. Scattered throughout these articles, readers will find some of the most valuable information that can be obtained when taking on the task of fixing bad credit. However, I have yet condensed this information into a simple list. Countless emails have found their way into my inbox this week from readers expressing their disappointment that they didn’t come across this information earlier.

If you have paid any attention at all to the recent economic problems being absorbed by Wall Street due to this country’s credit problem, you understand how many people sincerely have credit problems that are crippling their lives in almost every way.

My goal, of course, is to reach as many people as I can. Therefore, I have compiled the following list of tips to fix bad credit for people that may not have time to read all of my in-depth articles. Some of this information is extended in more depth in previous articles, and some of this information I will write about in future articles. I encourage you to scan over each tip, and when you have time, read the full article pertaining to that particular tip.

The 10 Surefire Tips for Fixing Bad Credit

1. Get a copy for your credit report before contacting a debt collector. You need to know exactly how much you owe –don’t rely on a collection letter.

2. Never negotiate a debt over the phone. Always negotiate via certified mail. A paper trail provides you legal protections.

3. Negotiate for negative records to be completely removed from your credit report.

4. When you are ready to pay off a debt, attempt to contact the original creditor before dealing with a collection agency.

5. Dispute inaccurate information on your credit report. This includes inaccurate personal information such as address and employment information.

6. Have at least three lines of credit in good standing for a minimum of two years. Preferable this would be two credit cards and one installment loan. Get a credit card for people with bad credit here

7. Pay down any student loans 70% if possible. A large amount of student loan debt can weigh heavily on your credit.

8. Pay down credit cards and maintain a 20/80 debt-to-credit ratio.

9. Do not close credit card accounts that are in good standing. Keep them open even if you don’t use them. Read my article on this.

10. Be patient and remember it takes much less time to screw up your credit than to fix it. The process of fixing bad credit may take you a few years, but if you are persistent, you will find it’s much easier and rewarding than you may think.

Independent Thought

Before giving a yes to a loan calculate the payments using a loan calculator that will make you aware exactly how much you have to pay for how long. Google lender loans for vast results of lenders. The bank loan market will grow as interest rates have been cut in December, 2007. If your business is in dire need of a business loan and you have bad credit history you may want to check out financial institutions that offer a bad credit loan. Consider a credit union loan, which is on easier terms than most bank loans.