Millions of consumers are now starting to see the financial benefits of the economic improvements observed over the last few years and may be feeling better about their abilities to handle new balances, but those who have suffered credit troubles in the past may actually do even more damage if they're not careful to repair their standings before applying for new accounts.
Unfortunately for consumers who have gone through financial complications that may have lowered their previously good credit scores, one very common misstep is that relatively soon after they get their finances in order once again, they feel the need to begin applying for new accounts as soon as possible. However, because they will likely have a low credit standing in general, many lenders may reject their applications on the basis that they are seen as too risky. And that, in turn, can further reduce their chances for being approved.
Why that matters
Though it's not a large portion of one's score — just 10 percent in all — the number of what are known as "hard inquiries" into a person's credit standing can certainly have an impact. The difference between a soft inquiry and a hard one is that the latter is made by lenders after a consumer files an application for a new line of credit, while the former is often done either without their knowledge (such as for pre-approved credit cards) or for non-financial reasons (credit checks run by potential landlords or employers). Borrowers taking the time to check their own credit reports also do not count as hard inquiries. Other times a number of inquiries might not count against a borrower is when they are considered to be "rate shopping," or running a number of credit checks through various lenders in a relatively short period, usually a few weeks or so.
However, the reason for the differentiation between hard and soft inquiries in determining a person's credit score is that if a borrower tries to obtain several accounts and is repeatedly rejected, but also continues sending in more applications, lenders generally tend to view that as being an indication of cash flow issues that may make them more likely to slip into delinquency and default in the future. As such, those who have applied for credit and been rejected may want to stop making attempts to qualify for credit of that type and take the time to do a little financial evaluation to determine exactly what areas they need to improve.
What can be done
The simplest steps consumers can typically take to improve their credit standings after they may have fallen considerably is to get the two biggest factors used in determining scores — payment history, and the amount of debt they carry as a percentage of their total limits — under control. The first of these makes up 35 percent of a score and is the easiest to fix. Those who have missed deadlines in the past can somewhat recover from the mistakes by making repeated on-time payments into their accounts for a period of several months or more. While doing so will not erase their mistakes from their borrowing histories, it will show lenders that the incidents were isolated, and unlikely to be repeated now that borrowers are back in good financial health.
On the other hand, reducing debt — which makes up another 30 percent of one's score — isn't always an easy prospect, but doing so has significant rewards even beyond the most practical upshot of boosting credit standing. It will also reduce the rate at which interest charges accrue and therefore slash the financial burden of carrying so large a balance going forward. In general, to max out this portion of their scores, borrowers should aim to be using about 30 percent of available credit limits at most. This means that for accounts with $5,000 maximums, borrowers should aim to have $1,500 or less outstanding at any one time.
Finally, it's also important that consumers take the time to check their credit reports, which will give them a fairly comprehensive overview of all accounts listed in their name, the standings of those balances, what they owe on them, and more. In addition, it may also help them to identify whether there may be any unfair markings having a negative impact on their scores, typically without their knowledge.
If this is the case, it may be wise for these consumers to get in touch with a credit repair law firm, which may be able to help them dispute these problematic entries and have them stricken from their credit reports in a more timely manner than the borrowers might have been able to achieve on their own.