When you hit rock bottom, there is only one way to go.
Technically, a rock bottom credit score is the lowest possible FICO you can get, which is 300. No matter how poorly you managed your finances, you probably have not yet reached the technical definition of a rock bottom credit score.
The principal scientist for FICO, Tommy Lee, said, “FICO scores of 300 are extremely rare; in fact, only 1% of the population has a score less than 470, and 4% have a score less than 500.” Any credit score landing in the poor range that runs from 300 to 579 should be considered rock bottom.
Let’s see how we can pull your credit score out of the rock bottom range.
Start with Baby Steps
It is highly frustrating to land in the poor credit score range. From banks to credit card companies, creditors do not want to extend you credit. The best strategy for pulling yourself out of the rock bottom credit score range involves slowly rebuilding your credit history.
Start by taking out a secured credit card, which requires customers to put up cash as collateral to use the card. For example, a secured credit card offered by Capital One might require a $500 deposit, which means you can run up a maximum debt of $500. After several months of meeting your debt obligations, the credit card issuer might boost your available credit.
Now, you are on your way to leaving rock bottom behind.
Pay on Time
Paying off a minimum credit balance every month is not the only responsibility you have to the creditor. You also have to pay off at least the minimum balance before the due date. Just a one-day late payment on a personal loan can send your credit score south quickly. The three major credit reporting bureaus (Equifax. Experian, and TransUnion) place a lot of weight on timely credit payments.
Lower Your Credit Utilization Ratio
Your credit utilization ratio represents the amount of revolving credit you have taken out divided by the total amount of revolving credit that is available to you. It is the amount of money you currently owe divided by your total credit limit. Although there is not a magic number that you should work towards, consumers that have credit utilization ratios below 30 percent typically receive higher credit scores.
Review Your Credit Reports
According to federal law, consumers are entitled to receive one free credit report each year from the three major credit reporting bureaus. This means you can order a free credit report from Equifax one month, and then wait another four months to order a free credit report from Experian. Wait another four months to ask TransUnion for a free credit report. With a credit report sent to you every four months, you should be able to stay on top of any errors that appear on any of the reports. Credit report errors can send a credit score into a freefall.
Do Not Close Accounts
After you pay off a credit source, it seems to make sense that you should close the account. If you close a credit account, you wipe out all the available credit, which raises your credit utilization ratio. Just because you leave an account open does not mean you have to access the credit attached to the account.
Stop Impulsive Spending
One negative associated with credit cards is that they are easy to pull out of a wallet to make impulsive purchases. A study conducted by Dun and Bradstreet discovered consumers spend between 12 percent and 18 percent more when using credit cards than when paying with cash. Creating a monthly budget and following it is a good start to curtail impulsive spending. However, like every other recommendation listed here, stopping impulsive spending boils down to one sound financial principle: Discipline.
Do not get down if your credit score has hit rock bottom. With patience and prudent financial decisions, you can soar to a higher credit score by sticking with a game plan.