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The best ways to deal with terrible credit

Not knowing what's making your credit score poor will keep you from fixing it. The good news is bad credit can be fixed with some tweaking and effort.

Almost no one wants terrible credit. But having terrible credit can be a simple result of not understanding how credit works. How does that saying go…”you don’t know what you don’t know.”

Many consumers have no idea that one late payment can tank a good credit score. Or, that spending most of your credit limit can lower credit scores. Learning everything possible about how credit works is worth your time and money.

In 2016, Transunion reported 43% of borrowers ages 18 to 36 have a credit score of 600 or below on a VantageScore scale ranging from 300 to 850. A 600 credit score is considered poor (subprime) and lenders may deny you credit.

The top factors that contribute to a subprime credit score is:

  • Late payments
  • Paying only the minimum due
  • Carrying high balance on multiple credit cards
  • Applying for multiple lines of credit in short period of time
  • Collection accounts

Best actions to deal with terrible credit

1. Make credit card and loan payments on time. One late payment can reduce a good credit by as much as 100 points and the negative notation can stay on your credit reports for seven years. Even though a one-time late payment that is 30 or 60 days late isn’t going to have as serious long-term effect on your credit score as a payment that is 90 days late, it’s best to avoid late payments at all costs. Call your creditor if you are going to be late, they may have a solution such as putting the payment at the end of the loan, that will save your credit score.

2. Pay more than the minimum. Routinely paying the minimum due on credit card debt can have dire consequences on your credit history. Credit card interest adds up quickly, for example: A credit card balance of $6000 with a 15% annual percentage rate (APR) typically requires 2% payment of that balance as a minimum payment. With a $120 minimum payment towards a $6000 balance, you would end up paying approx. $9,184 in interest alone, assuming you’d pay that minimum for the full 355 months.

3. Pay down your debts. Only use a small portion of your credit card limits and apply for new credit only when absolutely necessary. High credit card balances will drag down your credit scores. It is particularly harmful when you have multiple credit cards with high balances. Pay down your debt, even if you have to start with the lowest limit credit card first. It will help your credit scores.

4. Deal with recent collection accounts. Collection accounts on credit reports are pretty bad. But the good news is that the older a collection account, the less negative damage it does to credit scores. Lenders generally look at the most recent 2-years credit history when making credit decisions. If you have recent collection accounts, there are a few ways to deal with them. In some newer credit scoring models a paid collection has no negative impact on credit scores. Unfortunately, the majority of lenders are not using the newest FICO scoring models.

Negotiate a pay for deletion with the collection agency. There are some collection agencies that will tell you they are prohibited from deleting accurate information from credit reports, but upper management has the discretion to go against company policy.

If a pay for deletion is not an option, review your credit reports for any inaccuracy with the collection account listing such as wrong amounts, account types, dates, etc. It may take some extra work but many have been successful in bugging a debt collector enough with disputes, debt validation requests and complaints to state and federal agencies and the Better Business Bureau, that they give in and delete.

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