If you have a bad credit score, you might be feeling frustrated and discouraged by the challenges it creates for your financial life. A bad credit score can make it hard to qualify for loans, credit cards, apartments and even some jobs. It can also mean paying higher interest rates, insurance premiums and security deposits than people with good credit.
But don’t lose hope. You can recover from a bad credit score by following some best practices and taking action to improve your credit situation.
Here are some steps you can take to rebuild your credit and regain control of your finances.
1. Check your credit reports.
The first step to fixing your credit is to know where you stand. You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, TransUnion and Experian) once every 12 months at AnnualCreditReport.com. You can also access free weekly credit reports through April 2021 due to the COVID-19 pandemic. Review your reports carefully and make a list of any negative or inaccurate information that is hurting your score. You should also look for any signs of identity theft, such as accounts or inquiries that you don’t recognize.
2. Dispute errors.
If you find any mistakes or fraudulent activity on your credit reports, you have the right to dispute them with the credit bureaus and the creditors or collection agencies that reported them. You can file disputes online, by phone or by mail, but make sure to provide evidence to support your claim, such as copies of statements, receipts or letters. The credit bureaus have 30 days to investigate and respond to your dispute, and if they agree that the information is wrong, they will remove it from your report and update your score accordingly.
3. Pay your bills on time.
One of the most important factors that affect your credit score is your payment history. Paying your bills on time shows lenders that you are responsible and reliable with your finances. On the other hand, missing payments or paying late can have a negative impact on your score and stay on your report for up to seven years. To avoid missing payments, you can set up automatic payments, reminders or alerts with your creditors or bank. You can also contact your creditors if you are having trouble making payments and ask for a hardship plan or a payment arrangement.
4. Pay off debt.
Another key factor that influences your credit score is your credit utilization ratio, which is the percentage of your available credit that you are using. The lower your utilization ratio, the better for your score, as it shows lenders that you are not overextended or relying too much on credit.
A good rule of thumb is to keep your utilization ratio below 30%, but ideally lower than 10%. To lower your utilization ratio, you can pay off some of your balances, especially on high-interest cards, or request a credit limit increase from your card issuers.
5. Get help building credit.
If you have a limited or damaged credit history, you might benefit from getting some help building credit from someone else. For example, you can ask a family member or a friend with good credit to add you as an authorized user on their credit card account.
This way, you can piggyback on their positive payment history and boost your own score without having to apply for new credit yourself. However, make sure that the primary cardholder pays their bills on time and keeps their balance low, as their actions will affect your score as well.
Another option is to apply for a secured credit card, which is a type of card that requires a security deposit as collateral. The deposit usually matches the credit limit, so if you deposit $500, you get a $500 limit.
A secured card works like a regular card in terms of making purchases and paying bills, but it helps you build credit because it reports to the credit bureaus. As long as you pay on time and in full every month, you can improve your score and eventually graduate to an unsecured card.
6. Avoid new hard inquiries.
Every time you apply for new credit, such as a loan or a card, the lender performs a hard inquiry on your credit report to check your eligibility and risk level. A hard inquiry can lower your score by a few points and stay on your report for two years. While one or two hard inquiries might not make a big difference, too many of them can hurt your score and signal to lenders that you are desperate for credit or having financial problems.
Therefore, it’s best to avoid applying for new credit unless you really need it and are confident that you can get approved.
7. Monitor your progress.
As you work on rebuilding your credit, it’s important to monitor your progress and track your results. You can check your credit score regularly using free tools online or through some banks and credit card issuers.
You can also sign up for credit monitoring services that alert you of any changes or updates on your credit reports, such as new accounts, inquiries or disputes. Monitoring your credit can help you stay on top of your credit situation, spot errors or fraud, and celebrate your achievements.
8. Be patient and consistent.
Recovering from a bad credit score takes time and effort, but it’s not impossible. You can improve your credit by following the steps above and being patient and consistent with your actions.
Don’t expect to see results overnight, but don’t give up either. With good habits and discipline, you can rebuild your credit and enjoy the benefits of having a good credit score in the future.