Pay Down Credit Card Balances
Take charge of your credit cards by paying down their balances.
If you have any outstanding balances, make room in your budget to pay down these debts bit by bit, every month until they are gone.
Know your credit limits and make every effort to stay well under the maximum when charging items.
Thats because credit bureaus analyze your debt load as a ratio. If you charge $500 on a card which has a $1,500 limit, youve used 33%, which is better for your credit score than charging the same amount on a card which has a $1,000 limit , both of which are better than being maxed out .
Pay these credit cards down, but dont cancel them. The total amount of available credit affects your score, even if you owe nothing.
Dealing With Identity Theft
The first step to repairing your credit is to get a copy of your credit report. You can request a free copy from each of the credit reporting agencies, Equifax, Experian, and TransUnion once a year through AnnualCreditReport.com.
Once you have a copy of your credit report, make sure that all of the accounts and debts listed are correct and up to date.
If your identity has been stolen, it is possible that someone has applied for a loan in your name and then not paid.
This can have a big impact on your credit score so it is important to resolve the problem quickly.
If you think you are a victim of identity theft you should file a police report, explaining why you believe you are a victim and what debts have been opened in your name.
You can begin the repair process by disputing the debts with the credit reporting agencies and sending them a copy of the police report you submitted.
Know How Your Score Is Calculated
Of course, once you know whats on your credit reports, its of the utmost importance to understand how, exactly, each account is impacting your credit score. With so many apps and credit cards offering free credit scores these days, its easy to become obsessed with that three-digit number without developing any notion of how it really works.
The two major scoring agencies are FICO and VantageScore, and each scoring system operates with a range of 300 to 850, with 850 being the best credit score. Each scoring agency uses the same basic factors to calculate your score, though they weigh the factors differently in their calculations.
This chart breaks down the factors that go into your FICO credit score.
Regardless of scoring model, the most influential factor of your score is your payment history, which is more than A third of your FICO score and considered to be extremely influential to your VantageScore. Due to this factor, delinquent payments and defaulted accounts can drop your credit score by dozens of points. Always make your full payments by the due date to avoid detrimental credit score impacts.
VantageScore looks at many of the same factors assessed in your FICO score calculation.
Finally, scoring agencies look at your credit mix, which is worth 10% of your FICO score and considered with your credit age in VantageScore calculations. Maintaining a variety of credit types, including both revolving and installment credit lines, can help you with this factor.
Check Your Free Credit Score
First, check your credit score for free to view the factors that are most affecting it.
Your credit score is most impacted by the following elements:
- Your payment history , including whether you always pay bills on time or have had late or missed payments in the past.
- How much total credit you have available and how much of it you’re actively using, known as your credit utilization rate .
- How long you’ve been using credit .
- The mix of credit types you’ve had and are currently using .
- The number of recent credit accounts you’ve opened and applications you’ve made, which are known as hard inquiries .
It’s also important to check for any errors on your , including inaccurate personal information or accounts fraudulently opened in your name. Especially if it’s negatively affecting your score, dispute this information with the credit bureaus. Submitting a dispute does not affect your credit itself. But if any content in your report changes, your score could change too.
Decrease Your Interest Rates
If youre stuck dealing with bad credit, of course, telling you to pay down your debt is likely quite redundant. Many people would happily pay down their debt if they could they simply cant afford to do so. One way to make repaying your debt more affordable is to lower your interest rates, thus decreasing your monthly payment as well as the amount of time it takes to pay off your debt.
While this can mean negotiating with creditors directly to secure a lower rate and/or negotiate a payment plan, you may be able to consolidate at a lower rate, instead. This involves taking out a personal loan with a lower APR, then using the loan to pay off your high-interest credit card debt. Consolidation will also turn multiple credit card bills into a single, easy loan payment. Our favorite loan providers offer amounts from $500 up to $35,000.
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Stop Using Credit If Possible
This can be tricky, especially if you dont have savings to fall back on or an emergency fund.
Recall earlier how we talked about credit owed versus credit available? It is advisable to keep this at about 30% rather than maxed out all the time.
For example, if you have credit cards with an available limit of $10,000, you should try to keep them at a balance of $3,000 or less.
If creditors see that you take out a credit card and max it out over and over, you will be much less likely to get a loan when you really need one, or you will get socked with a super high-interest rate.
Also, if you are using credit to pay off other debts, you are just shifting your debt from one place to another and not actually paying anything off.
So if you can, stop using those cards and start paying them down, on time!
Keep Old Credit Cards Open
You might be tempted to close old when youve paid them off. However, dont be so quick to do so. By keeping them open, you can establish a long credit history, which makes up 15% of your credit score.
There are a few caveats here, though. Your issuer may close your card after a certain period of inactivity and if it charges an annual fee, it might be worth closing.
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What Is Bad Credit
People end up with bad credit for many reasons, including:
- Missing bill payments or paying bills late
- Carrying too much debt
- Using a large percentage of your available credit
- Applying for frequent loans.
- If you are making frequent credit applications, lenders may think that you are having trouble making ends meet.
Keep These 7 Credit Repair Tips In Mind
Keep these credit repair tips in mind as you work toward a better credit score.
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To Improve Your Credit Score:
- Pay your bills on time. Even one or two missed payments can cause your credit score to drop. Even if youre not able to pay off your balance in full, make sure you pay at least the minimum payment by the due date.
- Dont use too much of your available credit. Lenders like to see people using about 30% of the credit available to them. This shows that you can use credit responsibly without maxing out your cards. For example, if you have a credit card with a $10,000 limit, you should aim to only use about $3,000 at any given time.
- Reduce your budget so you dont end up applying for new credit to make ends meet
If you have a bad credit score and you want to rebuild it, but lenders wont give you a credit card, you might think that youll have no way to prove that you can handle credit responsibly. In these situations, a secured credit card can help.
A secured credit card is backed by a deposit. If you put down a deposit of $500, for example, youll likely receive a secured card with a $500 limit. You can then use this card like any other credit card. Many people who are unable to get a traditional credit card can get a secured credit card with a deposit. Making small purchases on this card and paying them off on time will help rebuild your credit score over time.
Ride Some Great Credit Coattails
Say your spouse has a credit card with little or no balance and a great payment history if he or she agrees to add you as an authorized user, from a credit score point of view you automatically benefit from her card’s available credit as well as her payment history.
Keep in mind if he or she makes a late payment, that entry will appear as negative on your credit report too.
So choose your credit card friends wisely.
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How Long Will It Take To Rebuild My Credit
Credit missteps and misfortunes do eventually fade into the past. The impact on your credit score and the time it takes to recover depends partly on how big the mistake was and how recent. Late and missed payments, judgments and collections stay on your credit reports for seven years. Bankruptcy can linger for up to 10 years.
However, you can begin repairing things right away. You should begin to see improvement as soon as you start accumulating positive credit information to help counter the big negatives. In time and as your credit score grows, you’ll be able to consider new credit offerings that offer rewards and incentives to users.
Pick whatever strategy or combination of strategies works for your situation, then monitor the results. You can get a free credit score from NerdWallet. It updates weekly and allows you to see your credit score over time. You can check it to see how your efforts are paying off.
If your score is low, you can quickly build it up again by paying cards more than once a month or disputing credit report errors. Be wary of companies that promise quick fixes or ask you to get a as a path to fresh credit.
Your score can start to recover as soon as you start adding positive credit information to help counter the negatives you have on your credit reports.
About the author:Bev O’Shea writes about credit for NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.Read more
Apply For New Accounts Wisely
While its important to keep your older accounts open, its just as important to be careful about how and when you open new accounts. Not only does each new account decrease your average account age which contributes to 15% of your credit score but every application for a new credit account will be taken into consideration, as well. Indeed, new accounts make up a full 10% of your score calculation.
Before applying for new credit, carefully consider if youll be applying for additional new credit in the near future, and whether you need the credit at all. A characteristic shared by the 3 million Americans with perfect credit is the tendency to open new credit sparingly, and the typical super-prime consumer goes an average of nine months between new inquiries.
Of course, as you work on fixing your credit, the credit score dings from opening new accounts will become less intense. As you approach the national average of a 700 FICO score and the good credit category, youll be better able to handle both the credit score impacts of new credit as well as the financial responsibility it represents.
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How To Fix Bad Credit
To fix bad credit, you first need to assess the factors that are dragging down your score.
If your main issue is that you have a short credit history, you can boost your credit score using a rent reporting service, a program that reports utility payments or a secured credit card.
But if you have negative marks on your report or a high credit utilization ratio, then your best bet is to come up with a smarter repayment strategy, like a debt consolidation plan.
What Is A Credit Score
Your credit score is a three-digit number. Itâs calculated from the information a credit reference agency holds about you. Your credit score usually comes with your credit report, which gives you more details about your credit history.
Lenders use your credit score, plus other information, to decide whether they will lend you money.
The UK has three CRAs:
Thereâs no such thing as a universal credit score â each CRA uses different information and methods to calculate your credit score.
Understanding your credit score and report is the first step to improving how lenders view you and your credit history.
Once youâve seen your credit report and score, youâll be able to do things to improve it, and get a better understanding of how you can move on up to a better financial future.
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Why Order All Three Credit Reports
Some of your creditors and lenders might report only to one of the credit bureaus. And, since credit bureaus dont typically share information, its possible to have different information on each of your reports. Ordering all three reports will give you a complete view of your credit history and let you repair your credit at all three bureaus instead of just one. Make an extra copy of each report in case you need to dispute information. You can send a copy of your report to the credit bureau and keep a copy for yourself.
How Long Does It Take To Rebuild Credit
Typically, it takes at least 3-6 months of good credit behavior to see a noticeable change in your credit score. It is difficult to make a change any faster, unless the negative information on your credit report was a minor blip, like being late with bill payments one month.
While it is impossible to put a specific time frame on , it is safe to say the less negative information you have on your report late payments, maxed out credit cards, constant credit applications, bankruptcy, etc. the easier it is to repair your credit score.
It takes more time to repair a bad credit score than it does to build a good one. Mistakes penalize your credit score and can prevent you from being approved for a loan. Though there are lenders that offer loans with bad credit, they end up costing hundreds or thousands of dollars in higher interest rates when borrowing. A poor credit score also can be a roadblock to renting an apartment, setting up utilities, and maybe even getting a job!
You are not going to lose nearly as many points if you are late with one payment as you will if you are delinquent for several months to the point where your account has been turned over to a collection agency. The severity of the second situation is far greater than the first and your score will reflect that.
Here are some time frames for negative information that detracts from your credit score.
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Consider Getting A Credit
If you have a poor credit history, you might want to think about getting a credit-builder credit card. These are cards designed for people who either have made little previous use of credit or who have a bad credit history. But credit limits on these cards are often low and the interest rates are high. This reflects the level of reassurance your credit file information provides to lenders.
Butbe aware that the interest rates charged are much higher than standard credit cards. Typically, youll be paying over 30% in interest a year, which is another reason to try to pay off any balance in full each month. Otherwise, you might end up in debt that you struggle to get out of, which could harm your credit rating even further.