A bad credit score can be a nightmare. However you got there, a bad credit score can lead to higher interest rates on mortgages, car loans, credit cards, and might even prevent you from getting a loan at all.
But if you do have a bad credit score, all hope is not lost. You can take some quick steps to improve your credit in the short-term to help you get over the hump to qualify for the best possible lending options for your needs.
1. Start Making 100% On-Time Payments
The largest determining factor in your credit score is making on-time payments. In fact, on-time payments make up 35% of your total credit score. Ignoring this and looking for other, easier solutions will leave your credit score lurking in the lower levels, not rising like you want.
Starting today, make every single payment on-time. If you can’t afford to pay off your cards in full each month, make sure you always make the minimum payment by the due date.
Using automatic payments can help make sure you never forget and have a late payment. You can set that up at your credit card issuer’s website or using your bank’s bill pay with participating credit cards.
2. Hunt Down and Remove Incorrect Negative Information
Your credit report is a treasure trove of information on your past borrowing and payment habits. It can also include information about collections and judgements from unpaid rent, parking tickets, and medical bills.
According to a study by the Federal Trade Commission, one in every five credit report has errors. It would be a huge bummer to find out your credit score is low thanks to someone else’s mistake!
Thankfully, you are entitled to a free credit report from each of the three major reporting bureaus, TransUnion, Equifax, and Experian, every year. You can get that free credit report at the official government website, annualcreditreport.com. Once you have your credit report, give it a thorough inspection for errors. If there is anything negative that shouldn’t be there, work with the creditor or the reporting bureau to get it removed.
3. Pay Off Credit Card Balances
The second biggest portion of your credit score is determined by your outstanding balances. This 30% of your score is determined by adding up your total credit card debt and dividing by your total available balance on all of your cards. This is called your debt utilization ratio. Don’t include installment loans like mortgages or student loans when calculating your debt utilization ratio, only credit cards and lines of credit.
Having $0 in outstanding balances is the fastest way to increase your credit score that you have total control over. Carrying a small balance to boost your score is a myth. Completely paying off your open balances on any credit cards or lines of credit will put you on the fast track to a better score.
You should always try to keep your debt utilization under 20%, or as close to zero as possible, to get the best credit score possible.
4. Increase Available Credit Card Balances
There are two ways to improve your debt utilization ratio. The easiest, and typically best, method is to pay off your credit card debt. You can also increase your credit card balances for a smaller improvement.
For example, let’s say you have 3 open credit cards. Your total balance owed across all three cards is $5,000, and the total limit on all three cards combined is $10,000. Right now, you have a 50% credit utilization ratio.
If you pay off $2,500, your utilization will drop to 25%, which will almost certainly increase your credit score the next time your credit card companies report your balance to the credit bureaus.
However, if you also ask for a credit limit increase on all three cards and can increase your open, available balances to $15,000 from $10,000, your new credit card utilization is about 17%, which puts you below the key 20% threshold.
5. Avoid Opening and Closing Any Cards
The length of your credit history makes up 15% of your credit score. It takes many years to improve the length of your credit history, but only a few minutes to make it worse.
Your credit score measures this portion of your credit report by looking at the average age of open accounts. If you have two credit cards on your report and they are four years old and six years old, your average age of open credit is five years.
Opening a new card will give you three cards that are zero, four, and six years old. Now your average age of open accounts is four years. In an instant, you lost a year! Open three cards at once, and now your average is two years, which could lead to a noticeable drop in your credit score.
In addition, applying for new credit cards or loans leaves inquiries on your credit report, which contributes to 10% of your credit. Each new inquiry will cost you a few points on your score, and they add up fast.
If you want your score to increase, leave things alone and avoid opening and closing accounts for a little while.
6. Pay off and Remove Collections
Collections on your credit report can lead to a big nosedive in your credit score. Collections show up on your account when you don’t pay a debt, like a credit card, loan, medical bill, or parking ticket. If you don’t pay long enough, those debts are passed onto a collections agency and show up as a collection on your credit report.
Sometimes those collections are just going to sit there and run their course. Most of the time, they will be on your credit report for 7-10 years. However, some creditors are willing to have them removed from your credit report if they are incorrect (see above) or resolved.
Contact the original creditor directly to see if you can work with them to remove the collection from your credit if you pay it off. Sometimes you will have to do some homework if it has been sold to a 3rd party collection agency, and you will have to work with them to get the negative information removed after the debt is satisfied.
7. Open a Secured Credit Card
I know that I just told you to avoid opening new cards, but there are exceptions to every rule. If you have a very thin credit report with only one or two cards, opening more cards will increase your score over time. It will take a short drop, and then rise over the coming months, but only if you keep a perfect on-time payment history.
If you can’t get a new card because your credit history is really bad, some banks will allow you to open a secured credit card to help rebuild your credit. A secured credit card requires opening a bank account and making a deposit for the full credit limit. That way, if you stop paying, the bank isn’t worried about losing money.
But you are not going to skip out on paying. If you do this, make it a new beginning for credit and always make 100% on-time payments.
8. Become an Authorized User
Most credit card accounts allow adding new credit card users to the account. If you have a parent or relative with excellent credit that trusts you, they can add you as a user to their account, which will add that credit account’s payment history to your credit report.
Note that some card issuers do not report for authorized users, and some lenders remove authorized user accounts from consideration when reviewing your creditworthiness.
However, in many cases, getting authorized user status will help pump up your credit score and credit report. Your results may vary.
Good Credit is a Marathon, Not a Sprint
These are all techniques that can raise your credit score in the short-term, but there are many long-term factors as well. A true credit score fix won’t happen overnight, and can take years of on-time payments and perfect borrower behavior.
If you keep to making on-time payments and keep your balances low, you’ll be on track to better credit without doing any extra work.
How are you working to fix your bad credit?