A person or business is deemed to have bad credit if they have a history of not paying their obligations on time or owing too much money. Individuals with bad credit often have a low credit score, typically less than 580 on a scale of 300 to 850.
Bad credit can be repaired, but it’s time-consuming. It’s also a minefield. You have to know what steps to take, where to turn for help, and which companies to avoid. The stakes are high, and the consequences could haunt you for years to come.
Your credit report, history, and score all wield a huge amount of power over your finances. In addition to determining whether you qualify for a mortgage, personal loan, or car loan, they also determine the terms of the agreement, such as your interest rate.
Here are a few tools, methods, and habits that can help you improve a poor credit score.
Credit Repair Strategies
# Examine your credit report for any errorsÂ
You have one credit report at each of the three bureaus: Equifax, Experian, and TransUnion, which contains information about how you have used credit over the past decade. In most cases, creditors report to all three, but not all, so make sure you review all three of them. In times of economic uncertainty, free credit reports have been made available weekly, but a free report at AnnualCreditReport.com is available at a minimum once every 12 months.
Your credit report is used to calculate your credit score, so it’s also important to check it. You can check your credit score for free through credit scoring websites or some credit card providers. We recommend checking your score once a month. You only need to make a soft credit inquiry to check your score.
Check your credit report for the following items:
- Accounts:
Look for accounts you don’t recognize, payments that are incorrectly reported as late, and other errors on your credit report.
2. Information about yourself:
It includes your name and any variations, birth date, current and past addresses, and employers.
3. Inquiries about credit:
Credit inquiries are when a company or individual accesses your credit report. Hard inquiries are when you apply for credit.
# Errors on credit reports should be disputed
Even a late payment that was actually made on time could lower your credit score if it’s inaccurate negative information. It does not affect your credit score if a creditor reports your name or address incorrectly, but it should still be corrected. Disputes can be filed with the relevant credit bureau if you believe something on your credit report is inaccurate.
You can dispute errors in your Experian credit report online, by mail, or by phone; TransUnion and Equifax have their own dispute processes. If you file a dispute, Experian checks the records of the company that provided the disputed information. Incorrect information is corrected. Information that cannot be verified is deleted or updated.
# Bring Past-Due Accounts Up to Date
When your payment is 30 days or more past due, it can be reported to credit bureaus as late. Since the payment history is the biggest factor in your credit score, even one late payment can lower your score. Late payments remain on your credit report for up to seven years.
If you’re late but not yet 30 days behind on a payment, pay it right away. If it’s already 30 days overdue, pay it as soon as possible. A 60, 90, or 120-day late payment hurts your credit score more than a 30-day late payment.
Ask your lender about hardship options if you can’t afford the payment.
# Think again about your credit utilization ratio (Maintain a credit utilization ratio of less than 30%)
There are many factors that contribute to your credit score. One of them is your credit utilization ratio, which shows how much credit you are using compared to your overall credit limit.
You should never use more than one-third of your credit limit. For example, if you have $1,000 of available credit, you shouldn’t use more than $300 of it.
When it comes to your credit utilization ratio, keep in mind that the 30% threshold is the maximum.
# Pay your bills on time every time
A good payment history makes up 35% of your credit score, so if you want to fix your credit, you should focus on paying your bills on time.
Pay your one-off medical bills as soon as you get them. If you can’t, contact the office and work out a payment plan.
We recommend setting up a budget and/or scheduling your autopay for the same time you get paid if you’re worried about overdrawing.
# Boost your credit score with a program
It is possible to raise your FICO score – the most widely used type of credit score – by expanding your credit file. These programs include alternative data as part of your credit report, which is not usually found in traditional credit scoring models.
In Experian Boost, you can enhance your credit report by reporting subscription payments to Hulu, Netflix, and your phone, utility, and rent payments (more on this below). Experian Boost is free and targets your FICO Score of 8.
Alternatively, UltraFICO is a free-scoring model that analyzes your checking, savings, and money market accounts to determine how “risky” you are as a borrower. Your UltraFICO Score will then show potential lenders your account history, the frequency with which you make bank transfers, the balance in your bank account, and the amount of cash you have on hand.
# Autopay Setup
Once your accounts are all current, keep them that way by setting up autopay. You can generally set up autopay directly with your lender or service provider or through your bank account.
If you pay your credit card and other accounts the minimum payment automatically, you can avoid late payments. To avoid overdrafts or insufficient funds transactions, make sure you have enough money in your account to cover all your auto pays.
# Getting rid of debts
Make a budget that allows you to pay off credit cards and other high-interest debt. Debt snowball and debt avalanche procedures can be successful debt-reduction strategies. A debt consolidation loan is another possibility.
You use a debt consolidation loan to pay off your credit cards, then repay the loan over time in fixed monthly installments. Although debt consolidation loans charge interest, rates are typically lower than those on credit cards, so ultimately you save money. One fixed monthly payment is also easier to budget for and pay on time than paying multiple credit card bills.
# Keep your old credit cards open
Keep your old credit cards open when you’ve paid them off. By keeping them open, you’ll establish a long credit history, which makes up 15% of your credit score.
It might be worth closing your card if it charges an annual fee and your issuer closes it after a certain period of inactivity.
# Obtain a Secured Credit Card
Secured credit cards work similarly to regular credit cards, except that they require a security deposit. In order to open the account, you pay a refundable security deposit (a few hundred dollars), which determines your credit limit. If you fail to pay your bill, the credit card issuer uses your security deposit.
It is easier for you to obtain a secured credit card even with poor credit if you pay a security deposit. You can improve your credit score by paying the balance on time and in full every month. Use the card for small purchases to avoid reaching your credit limit.
# Rent reporting services can be used
Some landlords, particularly those managing multiple properties, use digital platforms to keep track of their tenants’ payments – and to report them to the credit bureaus if the tenants have paid their rent on time.
Ask your landlord or property management company if they’re using (or willing to use) a service like Esusu since it establishes that you pay your bills on time.
It is always possible to use a rental reporting service like Rental Kharma or CreditMyRent if your landlord does not use a rent tracking platform. On-time payments will be posted to your credit report for a monthly fee by services like Piñata, which reports on-time payments to TransUnion only.
# Obtain a credit-building loan
The purpose of credit-builder loans is to build or rebuild your credit score. They are usually for amounts of $1,000 or less with repayment terms between six and 24 months. As you repay the loan in fixed monthly payments, the money is stored in a savings account or certificate of deposit.
You will be reported to the three major consumer credit bureaus as you repay the credit-builder loan principal plus interest. In order to improve your credit score, you must make timely payments. When the loan is paid in full, you will receive the money.
# Bad habits should be avoided
In order to improve your credit history and credit mix, avoid opening too many new credit cards or closing several old accounts without a larger financial strategy. With credit, nothing is disconnected, so closing old accounts and opening new accounts rapidly could negatively impact your credit history.
You may have to pay repeated hard inquiries if you apply for several new credit cards — say, a bunch of retail cards at various stores — within a short period of time, which can negatively affect your credit score. A secured credit card, backed by a security deposit, maybe a better alternative.
# Take your time
The process of rebuilding bad credit isn’t easy. Negative marks or delinquencies, such as missed payments, can remain on your credit report for seven years, and some types of bankruptcies can remain on your report for ten years.
A person’s credit may take months or even years to recover, but it is possible with some elbow grease. Avoid making rash decisions that could prove costly.
Frequently Asked Questions:
Is it possible to fix your credit by paying a company?
The majority of credit repair companies work by deleting negative information from your credit report, typically errors. But that’s only one tiny part of fixing your credit score. And you may be able to dispute errors on your own.
It’s not only expensive to hire a credit repair company (around $50-$100 per month, according to Experian), but you can also do it yourself. You can also find affordable credit assistance from a nonprofit credit counselor through the National Foundation for Credit Counseling if you really need it.
What is the average time it takes to fix your credit?
Despite taking some actions to improve your credit, such as paying off your credit card balance, you may not see the results as quickly as you expect. Generally, fixing your credit score is a long-term game. It can take creditors at least a few weeks to report your payment information and companies to update your credit score as a result.
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