by Frances Stanford

Created on: March 05, 2010

When you have a low credit score you will find it very hard to obtain a loan in today’s economy. This is because lenders see you as a poor risk to repay and will think that you may miss payments or even default on the loan. In order to get a handle on what lenders see when they take a look at your credit report, you should first request a free copy of your report from each of the three credit reporting agencies. You may think you only need to have one report, but lenders so not report to all three, but choose only one. Thus you may have a low score at one agency and high score at another depending on how prompt you have been with making your payments.

Once you have your credit report and see what your score is, then you can start taking the steps necessary to increasing the score. You do need to realize, though, that your credit score will not rise overnight or when you make any back payments that you owe. It takes at least six months to see any appreciable increase in a credit score.

There are different factors involved in calculating a credit score. The largest percentage is devoted to your payment history. This involves how responsible you have been in making your minimum payments on time and how many loans you have repaid in full. The amount of total debt you owe is another important factor because in relation to your income, this determines your ability to repay your debts. The length of time you have had a credit rating accounts for a percentage as well. The longer you have been making payments on loans and other debts, the better rating you will have in this category. The type of credit that you use most often has a direct impact on your score as well. If you rely on credit card usage and only make the minimum payments each month, this means that you are not in a good financial situation because the interest consumes most of each payment.

To start improving your credit score, the first thing you should do is prepare a budget in which you list all your income and your monthly expenses. Include everything in the expenses, such as groceries, transportation costs, clothing amounts and leisure. Subtract the expenses from the income to determine the amount you have left over each month. If there is an amount remaining, then you should start tackling some of your debt by making extra payments. In this way you will start paying off your debt and eventually become debt free. If this is a negative, then you do need to take some steps to get your finances back on track.

Take out a debt consolidation loan to improve your credit score. You may think that this is a counter-productive move, but it is not. Many lenders will approve a debt consolidation loan because they see that you are trying to improve your financial situation. Using the money from a new loan to pay off some of your debts in full makes a good impression on a credit report and thus improves your credit score. The monthly payment that you have on this loan will be significantly less than the combined payments of several loans, giving you more money for other expenses.

Contrary to popular opinion, you do have to have debt in order to have a credit score. Without it you have a low score and thus will find it hard to obtain a loan. You should start by applying for a credit card with a low limit, use it once in a while and then make regular payments. Paying off the balance each month does not improve your score either, so you should have a little balance every few months.

Learn more about this author, Frances Stanford.
Click here to send this author comments or questions.