Step 2: Improve Your Payment History – Bring Your Accounts Up To Date and Pay Down Debt
FAQ: Does it matter what kind of credit I use? Credit is credit, right? Wrong. Beyond how much you owe, different types of credit function differently when it comes to calculating your credit score. Take an installment loan, like a car loan, from your bank or credit union at a good rate versus a consolidation loan from the same lender. The debt consolidation loan means that you were having trouble paying your various obligations, so while it’s better than having all sorts of bad credit hanging around, a consolidation loan is harder on your credit score than a good vehicle loan. But don’t let that stop you – if you need a consolidation loan, in the long run, that will help your credit rating improve because you’ll have taken care of what you owe.
Your payment history is the largest factor affecting your credit score, so if you’ve been behind on your payments – or haven’t been making your payments on time – your credit rating likely won’t improve much unless you get your accounts up to date and keep them that way.
If you’re in a tough spot and you can’t afford to bring your delinquent accounts up to date at once, contact your creditors to see if you can negotiate a payment arrangement that works with your budget. If you and your creditors aren’t able to work out an arrangement, one of our credit counsellors may be able to help you create a plan to bring your accounts up to date and deal with your debt.
In addition to getting your accounts up to date, paying down your debts is also a key part of rebuilding credit. The amount of debt you have owing in relation to the available credit you have – known as your credit utilization ratio – is the second most important factor in your credit score. Let’s say your available credit limit is $10,000 and you’re using $7,500. Your credit utilization is at 75%.
If you are using a good chunk of your available credit, it can have a negative impact on your credit score. So it’s important to pay down as much of your debt as you can. Ideally, you want to try to get your credit utilization down to under 60%. Thirty-five percent or less is the very best though. For every debt you pay down, your credit utilization ratio will decrease, which will help with your overall credit rating. If you use more than 75% of a credit card, line of credit, or overdraft on an ongoing basis, this will have a significant negative impact on your credit score until the balance is paid down.
Get All the Details: How Your Credit Score is Calculated
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