You aren’t alone if you have a bad credit score.
Nearly a third of Americans in total and 43% of millennials have a bad credit score.
Credit scores are important. The biggest impact they have on your financial life is on your ability to take out loans, but it goes beyond simply qualifying for a loan. The better your credit score, the better the interest rate you will get on your loan.
Getting a worse interest rate could cost you hundreds or thousands over the life of a loan. Use this as motivation to improve your credit score.
Thankfully there are a number of practical things you can do to improve a low credit score.
But first, for context here is a general breakdown of what your credit score means:
Less than 500: Very Bad
500-549: Bad
550-599: Poor
600-649: Fair
650-699: Good
700-749: Very Good
750 and up: Excellent
As a starting point your goal should be to get your score into the 600s. Once you are in the 600s, it’s time to shoot for the 700s. This can take a while, but it’s absolutely possible.
How do you know what your score is? Virtually every credit card today offers your credit score free of charge when you log into their online dashboard. You can also get it free of charge through Credit Sesame.
To understand how to improve your credit score it’s important to be aware of what makes up your score. Here’s the five different factors that influence your credit score, and the relative weight given to each:
35% Payment History
30% Amount Owed
15% Length of Credit History
10% New Credit Applications
10% Types of Credit
With all that in mind, let’s go over five specific ways you can improve your credit score, especially a bad credit score.
1) Catch up on Payments
If you’re behind on payments one of the best things you can do is catch up. Missed and late payments hurt your credit score, but reversing the trend and consistently making your payments can turn the tide and help your credit score recover.
This may require making a call to your lender to come to an agreement that works for both of you. If you make it clear you want to get back on track they are likely to work with you, as it benefits them to avoid having loans go into default where they may only recover a small portion of your debt.
Your payment history affects 35% of your credit score. If you want to start improving your credit score, you need to make all of your payments on time. Any debt that has gone unpaid for 150 days can have a serious impact on your credit score. The good thing, though, is that reversing course and making your payments on time can have a big positive impact on your score.
2) Reduce Your Credit Utilization Rate
Carrying a balance does not impact your credit score, but your credit utilization does. Credit utilization is how much of your available credit you are using. For example, if you have $10,000 of available credit and you are carrying a balance of $5,000, your credit utilization is 50%.
The lower your credit utilization the better, but best practice is to keep it below 30%. For those who are maxed out on their credit cards or who are far from being at 30%, it’s important to think long-term. You may not be able to pay off your debt overnight, but you can slowly make progress over time.
Like making on-time payments, having an appropriate credit utilization can have a big impact on your score. The amount you owe makes up 30% of your credit score, while payment history makes up 35%. That means about 2/3 of your score is made up by just these two factors. Get these two right and your score will increase over time.
3) Think Twice Before Closing a Credit Card
The length of your credit history has a 15% impact on your credit score, which is a lot less than payment history and amount owed. With that being said, if you are trying to improve your credit score you should look at any opportunity to improve it, even if it’s just 15% of your score.
If you have a credit card with no annual fee, you should think twice before closing it. Even if you paid off your balance and don’t use the card, keeping it open can be a good move because it will be factored into your credit score. Let’s say you have $5,000 of available credit on a credit card and don’t carry a balance. That $5,000 can help lower your credit utilization. Your score also may get a boost if you have made on-time payments on the card. Closing the card would get rid of that available credit, which will hurt your credit utilization.
Again, this does not have as much of an impact on your score as other factors, but it’s worth thinking about. I’ve heard many people quote the inaccurate advice that “you should only have one card open or else it will hurt your credit score,” which is simply false.
If your card has an annual fee you will have to weigh whether the perks of the card make it worth keeping the card open. If you would prefer to close the card, you can first open a credit card with no annual fee.
4) Check Your Credit Reports for Errors
Checking your credit reports is an essential step for those looking to fix a bad credit score, and is a good thing to do each year regardless of what what your score is.
The three main credit reporting agencies are required, by law, to give you one free credit report each year. Thanks to the amended Fair Credit Reporting Act, consumers can request one free copy of their credit report from each of the nationwide credit reporting companies (i.e., Equifax, Experian, and Trans Union) every 12 months.
You can order your free credit report online at www.annualcreditreport.com.You can choose to get your score at separate times from each agency, or you can get them all at once.
If you find errors in your credit report, such as accounts that you never applied for, you can dispute the information to have it removed from your credit reports. When successful, disputing credit report errors can mean the world of difference for your credit score. Depending on the causes of a low score, it also may be one of the quickest ways to improve your score.
The first step is to tell the credit reporting company, in writing, what information you believe to be false or inaccurate. The second step is to tell the information provider (i.e. whoever provided that information about you to the credit reporting agency), in writing, that you dispute an item in your credit report.
From there the agency will review your complaint and take all evidence into consideration, either removing that history from your report or deciding that your complaint isn’t valid. Be patient but persistent.
5) Consider a Credit Builder Loan
You may have “bad” credit simply from your lack of a credit history. One way people with no credit history or bad credit history have quickly improved their credit score is through a credit builder loan.
I’ve worked with the company Self in the past and would recommend looking into their credit builder option. The loan is different than a traditional loan because you are actually paying yourself, and at the end of the term of the loan you actually have money saved up. They go out of their way to make sure that all three credit reporting bureaus are aware of your on-time payments, which in turn helps increase your credit score. learn more about Self and how it works.
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How this Blogger Increased their Credit Score 150+ Points in 8 Months
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Good tips DC! My credit was a mess after paying off my debt and a few of these things really helped me up my score. I’d also recommend that once you get moving in the right direction and kill your debt to make a small purchase or two each month and pay it off as it can also work towards improving your credit. It may be the last thing you want to do but having good credit can help you in a lot of ways.
Good tip on making the small purchases. Having your credit be “active” and continually showing that activity can pay off.
Absolutely helpful post, thanks for sharing:D
I’m glad you enjoyed it giulia!
Here’s another tip to add to the list- use your credit card to make trivial purchases (like a bottle of water or a pack of gum) then pay back the bill before the month ends. This shows a consumer’s ability to take out debt and repay it on time.
Agreed, you do need to keep your credit card “active.” The quicker you pay it off the better – keep that credit utilization low!
This had a lot of things I’d never considered about credit scores before, like considering your usage and how it’ll affect your rating. I’ll have to look into it and see if it works the same way in my country.