Is your low credit score preventing you from getting a good interest rate or from getting a credit card or a loan at all? Are you tired of waiting through the long and slow process of rebuilding your credit the conventional way? If so, you might be considering some extreme steps to improve your credit score. Let's consider a few of the options available, whether they actually work and if they're advisable.
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1. Rapid Rescoring
Rapid rescoring is a little-known strategy explained by credit guru Liz Pulliam Weston in her book, "Your Credit Score: Your Money and What's at Stake". Unlike credit repair services, which are almost always a scam, rapid rescoring is a legitimate way to improve your credit score in as little as a few hours - if there are verifiable inaccuracies on your credit report. For rapid rescoring to work, you must have proof that negative items on your credit report are incorrect.
Rapid rescoring is for people who are in the process of applying for a mortgage or other type of loan and, because of their low credit scores, are being denied credit or are being offered a high interest rate. Individuals cannot initiate rapid rescoring on their own, but a lender can do it on their behalf. The rapid rescoring service works with credit bureaus to quickly remove incorrect information from your report.
Because of the complicated way credit scores are calculated, even if you are successful in having the inaccurate, negative information removed, your score may not improve, may improve less than you'd hoped, or may even drop. But it's worth a shot.
2. Take out a Loan for a Major Purchase
According to Ken Lin, CEO of Credit Karma, "if you are within your means and in the right credit range, a car loan or mortgage is actually a great thing for your credit. Though the initial hard inquiry will knock a few points off your score, adding to your mix of credit is an important component of your score."
The credit scoring company FICO states that about 10% of your credit score is based on the mix of credit types you use. Its booklet, "Understanding Your FICO Score," states, "The score will consider your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use. The credit mix usually won't be a key factor in determining your FICO score - but it will be more important if your credit report does not have a lot of other information on which to base a score."
Lin adds, "Obviously, an enormous financial decision like taking on the debt and responsibility of a car or home should not be taken lightly or done for the sake of raising your credit."
3. Open Lots of New Credit Card Accounts
Obtaining additional credit cards increases your total available credit. Since credit utilization, or the percentage of your available credit that you have spent, is part of your score, it seems like lowering that percentage by increasing your total available credit would help your credit score. However, FICO states, "This approach could backfire and actually lower your credit score."
For one, opening lots of new accounts shortens the average age of your accounts, and a lower average age will generally lower your credit score.
Another problem, Lin points out, is that "available credit in your reach may tempt to you to overspend into debt, or on the flip side, not using your open credit cards may cause your issuer to close your card due to inactivity. A better strategy is to add to your existing cards' credit limits, and pay down existing debt while putting a freeze on credit card spending."
4. Take Out a Small Loan You Don't Need
If your credit score is preventing you from getting the interest rate you want, you may be able to improve your score by taking out a small loan and repaying it as promised - in other words, by adding some positive activity to your credit history. Also, because installment loans add to your mix of credit, if your credit history doesn't already include this type of loan, obtaining one might improve your score.
One option is to use a peer-to-peer service like LendingClub, which facilitates lending between individuals. The company reports borrowers' payment histories to credit bureaus, so if you can borrow money and repay it responsibly, using a service like this can help you rebuild your credit score. The minimum loan amount is $1,000 and you must have a credit score of at least 660 to apply.
Though this strategy may work, it's not necessarily a good idea. Lin calls it "a risky and costly way to raise your credit score because you'll have to pay for the loan's interest."
It also requires extreme diligence, because late payments will set you back in fees and interest and ding your credit score.
5. Use Retirement Accounts to Pay off Debts
Do you have piles of cash sitting around in a 401(k) or IRA that would wipe out your debt? It may be tempting to use these accounts for just such a purpose, and technically, you could.
But there are compelling reasons why you shouldn't. If you ever have to declare bankruptcy, retirement accounts are often protected, so they're a great source of long-term financial security. In the short term, you're likely to be faced with early withdrawal penalties and taxes if you take money out of these accounts. Those expenses could get you into an even bigger debt mess.
Saving for retirement is a wise financial decision that you'll thank yourself for later.
The Bottom Line
The credit repair strategies presented here might work for some people, some of the time, but they're called "extreme" for a reason: they aren't always effective and can even backfire. If you have a low credit score, the best remedy is to rebuild it the old-fashioned way by establishing a history of responsible financial behavior.
- credit score