Millions of Americans are now dealing with diminished credit scores that they are trying to correct as quickly as possible, even if doing so isn't always easy. However, one important aspect of this process that many may not consider is just how they'll know when they've done all they have to in an effort to regain a good credit score.
Many borrowers who are serious about getting their credit standings returned to normal may take a number of steps to do so, but it's also important that they know when their efforts have reached the point where they cannot be any more effective. While there are a number of ongoing factors that can be vital to maintaining a strong credit standing, other areas only require a finite amount of careful attention.
One aspect that's most important to credit repair
The second-largest portion of any borrower's credit score is the amount of money they owe to lenders, viewed as a percentage of their total credit limits. This factor, known as a person's "credit utilization ratio," makes up a full 30 percent of a rating, and therefore requires a lot of work for many borrowers trying to get back on track.
The first thing consumers will need to do when looking into improving their scores is seeing how much they owe versus what they're allowed to borrow. For instance, if a person has three credit cards in his or her name and they have a combined credit limit of $10,000, and that borrower owes a total of $7,500 on those cards, the credit utilization ratio for those accounts is 75 percent. This is extremely high when compared with what lenders want to see, which is 30 percent or less. The common misconception is that credit card issuers want borrowers carrying massive balances because it means they owe more, but they'd rather see consumers manage credit responsibly every month and not run up debt loads they cannot handle.
As such, one of the most important parts of credit repair that might only take a finite amount of time to get back on track is making sure balances get as low as possible, so that they can be maintained at those levels going forward. Usually, the best way for borrowers to get on this level is by discontinuing use of those accounts and instead making larger monthly payments than they may have been used to prior to these efforts to fix credit that may have been damaged by overspending and misuse. Larger payments will more quickly reduce balances which, in turn, will help to get back to that 30 percent level as soon as possible. Once that's done, it might be time to stop working quite so hard at improving credit.
Of course, once borrowers have put in this large amount of work in an attempt to sort out their credit issues, it's also important that they not fall back into the borrowing habits that got them into trouble in the first place. Making sure to keep spending within reason and paying back as much of the amount borrowed every month as possible will be vital to maintaining the standings they've just worked so hard to achieve.
Other things to keep in mind
Borrowers should also try to keep in mind that to have good credit, it's vital that they make all their payments on time and in full every month. This factor accounts for another 35 percent of their score, making it the single largest portion of that rating, and any one misstep can do massive damage as a consequence. For this reason, borrowers should make sure that any missed payment is followed by several months or more of on-time contributions to smooth over the mistake. Keep in mind these new on-time payments alone will not eliminate the damage done on the credit reports.
It's also vital that those who pay down some of their accounts to zero not close them, as doing so can have two negative impacts. First, it might diminish the average length of time they've had all their accounts — which makes up 15 percent of their rating — and will likely increase their credit utilization ratio substantially, depending on the size of that account's credit limit. Consequently, even if accounts are paid off in full, it's vital to keep them open, especially if the intent is to use them quite infrequently going forward.
Consumers who want to keep closer tabs on their credit going forward should also plan to check their credit reports with some amount of regularity in the future, as doing so may allow them to determine whether there are any unfair markings having a negative impact on their scores. If so, it might be wise to contact a credit repair law firm, as doing so may help them to more quickly deal with the issues.