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Can’t Get Approved for a Loan? What It Takes to Repair Your Credit

Having a good credit score can make life a lot easier.

According to an article on Capital One’s website, a good credit score will lower your expenses because “many lenders offer better terms and lower interest rates to people with good credit histories.”

They also say that a Good credit score may make it easier to:

  • Buy a home or rent an apartment.
  • Get a job.
  • Have phone or home utility accounts.
  • Obtain a credit card.

Conversely, if you have poor credit, it may be more difficult and expensive to do the above things.

So, what are some ways that you can improve your credit and increase your chances of getting approved for an apartment or a loan?

1) Pay Down or Restructure Your Existing Debt

If you are using more than 30 percent of your available credit balances, it may be putting downward pressure on your credit score. By paying off (or at least paying down) your existing balances, it may be possible to improve your score by dozens or even hundreds of points depending on your current situation.

For those who don’t have the money to repay their debts, it may be possible to take other actions to reduce your debt ratio. The first things that might come to mind are to ask for debt forgiveness from creditors or file for bankruptcy. But it isn’t always necessary to take such drastic action. For instance, if you have one credit card that you use all the time (even if you pay it off every month) and you exceed 30% of the credit limit on that card (even if you have other cards with a zero balance) it can negatively affect your credit score.

For example suppose you have 3 credit cards with $5000 credit limits on each. And your average expenses are $2,000 per month and you charge absolutely everything because that credit card pays you miles or points toward travel, etc. The credit utilization ratio on two of your cards is zero, but on the third card it is: $2,000 / $5,000 or 2/5 or  40%. Since 40% is greater than 30% the credit bureaus can ding your credit score for that. So what can you do?

You have a couple of options. First of all, you could spread your charges out over two or three different cards. If you put $1,000 on each of two cards your credit utilization ratio goes from 40% on one card to 20% on two cards. And if you spread it over 3 cards it drops to 13.3% each. But that means you aren’t racking up the miles you’d prefer.

Another option is to request a credit line increase from your preferred card. If you are paying off the balance every month they should be happy to comply. So if they increase your credit limit to $10,000 and you continue to spend $2,000 per month your credit utilization ratio on that card is now $2,000/$10,000 or 20%. And if they increase your limit to $15,000 your credit utilization ratio is 13.3% just as if you were using 3 different cards. Just be sure that you aren’t using those increased credit limits to get yourself into more debt!

2) Work With a Credit Repair Service

Generally, you can do everything yourself that a credit repair agency can do for you but it takes time and effort. Also if creditors know you are working with an agency they may figure that you are serious about reducing your debt and cut you some slack. Lexington Law, credit repair says, “sometimes negatives on your credit score are completely legitimate and can’t be removed by any extraordinary measures. Everyone’s situation is different, and so you should always go in with realistic expectations.”

One advantage is that, an agency may be able to work with your creditors to come up with payment plans that will help you get out of debt in as little as two years. Plus, it may give you a bit more incentive when you see a way out of your debt, i.e. you see there is a “light at the end of the tunnel”. So having an actual plan developed by a professional can be a benefit.

Professional help may also help you learn about interest rates, compounding interest and how to create a budget that you can stick to.

3) How to Repair Credit After a Bankruptcy

If you have had to file for bankruptcy, there are a few basic steps that you will need to take to repair your credit. For instance, you may want to apply for a secured credit card to reestablish a positive credit history. In some cases, you may have car or mortgage loans that are not erased in bankruptcy.

As long as those are paid off per the terms of the loan (or bankruptcy proceeding), your credit history and score should improve within 12-18 months. In many cases, lenders will only look at the first 12 months after your bankruptcy case was closed when determining if you qualify for credit.

It may also be a good idea to get a second job to increase the odds of getting a loan. This is because those with a higher yearly income tend to qualify for loans regardless of their recent bankruptcy. Increasing your income will also decrease your debt-to-income ratio, which could improve your credit score after filing for bankruptcy.

4) Securing a Loan Helps Regardless of Credit Score

Those who have poor credit may be able to increase their odds of getting a loan by securing it with collateral. It may also be possible to get a loan by adding a cosigner. A cosigner is someone who agrees to pay the loan in full if the primary borrower does not. However, if you are going to add collateral to a loan, make sure that you can afford to lose it.

Lenders may accept the title to your house, car or anything else of value that can be sold quickly. It is also important to point out that you could still be on the hook for any difference between the balance owed on a loan and the amount a lender was able to get after liquidating the collateral.

If you are looking to get a loan, you should first check your credit score to make sure that you qualify. In the event that you don’t, it may be a good idea to work with a financial adviser who may teach you strategies to improve your score and get that loan.

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About Tim McMahon

Work by editor and author, Tim McMahon, has been featured in Bloomberg, CBS News, Wall Street Journal, Christian Science Monitor, Forbes, Washington Post, Drudge Report, The Atlantic, Business Insider, American Thinker, Lew Rockwell, Huffington Post, Rolling Stone, Oakland Press, Free Republic, Education World, Realty Trac, Reason, Coin News, and Council for Economic Education. Connect with Tim on Google+