How To Fix A Bad Credit Score
A bad credit score will reduce your financial options and can lower your quality of life. But there are several things you can do to turn a bad credit score into an average one. If you’re worried your credit score is too low, you can follow these steps to set your credit in the right direction.
What Is A Bad Credit Score?
It depends on which credit reporting bureau you ask. There are 3 major credit reporting bureaus in the US:
Different countries have different credit reporting bureaus, but companies like Experian are trusted in other countries. For example, you can notice the similarity in the only 2 major credit reporting bureaus in Canada:
So, sticking to the major bureaus, a bad credit score is:
- For Equifax or Experian, “poor” credit would be a score of 579 or below. These bureaus both use the FICO Score Ranges.
- For TransUnion, a “D” or “F” score. If your TransUnion score is 657 or below, you have bad credit. TransUnion uses VantageScore 3.0 credit score ranges.
What Does A Bad Credit Score Mean?
There are many negative consequences to having a bad credit score.
- More difficulty getting loans and lines of credit, including:
- Car loans
- New credit cards
- Student loans
- Many landlords won’t approve your rental application
- Many lenders landlords and utility companies will require security deposits
- Difficulty getting a job with employers who check credit reports
- Difficulty getting a cell phone contract
- In some states, higher insurance premiums
If you want to reverse these negative effects, you’re going to have to improve your credit score. Here are the fastest ways you can up your score.
Review Your Credit Reports
Major credit reporting bureaus are obliged to provide one free report per year. You can order a report to find out what is causing your score to stay so low.
Normally, the factors that keep a credit score low are a mix of:
- Payment history, where late or missed payments lower your score. This is the most significant factor for credit scores.
- Your credit utilization, which is the portion of your available credit that you are using now.
- The length of time you’ve been using credit.
- The types of credit you’ve been using and are currently using
- The number of credit accounts you’ve recently opened.
- The number of credit applications you’ve made. Hard inquiries are made when you apply for credit, which will cause your score to temporarily drop. These drops are temporary and don’t lower your score as much as any of the above factors.
Another benefit to reviewing your credit report is that you can catch mistakes. Credit bureaus make more small mistakes than most people realize. Also, many people take a hit on their credit score after they become the victim of fraud.
If you believe that your report contains a mistake, you can open a dispute with the credit bureaus that hold it on your credit report. Likewise, you can have fraudulent transactions removed from your credit history.
Opening a dispute with credit reporting bureaus does not have an immediate effect on your credit score. There are no penalties for disputing items on your report either. However, changes to individual items on your report will have an impact on your credit score.
Catch Up On Overdue Accounts
This is not always an easy step, but it’s easily the most impactful one you could take. For FICO scores, in particular, almost a third of your score is comprised of the debt you currently owe.
It’s best to not miss payments and to pay in full. But if you’ve fallen behind, paying down your largest overdue debts down to a manageable level will have an immediate effect on your score. This is in large part due to the reduction in your credit utilization. Lowering your utilization rate will improve your score fast, while payment history takes a longer time to affect your score.
Overall, lowering your debt is a fast and useful way to improve your credit score. After that, aim to keep your utilization rate low. Experts typically recommend keeping your credit utilization rate below 25% to 30%.
Don’t Miss Payments
Missed payments quickly accumulate and lower your credit score. So, make all your minimum payments, even if you need to squeeze your budget a bit.
If you’ve lost control over your payments and aren’t sure what to do, the debt avalanche and debt snowball concepts are worth exploring. They both provide a clear, psychologically easy path to paying off debt and fighting the effects of interest as much as possible.
Revolving Account Balances
Credit cards and lines of credit come with “revolving” balances. That means that, unlike personal loans such as mortgages, you can continuously access credit within your credit limit.
These forms of credit make it easy for you to keep your credit utilization rate very high. For example, even if you pay your credit cards in full, constantly maintaining a credit utilization rate of 60% will keep your score lower. There are 2 things you can do about this:
- Lower the utilization rate by lowering the amount of credit you use
- Have your credit limit increased
Now, there is a drawback to the second option. Unless you can increase your credit limit without a hard inquiry, it will harm your credit score. Often, you can ask your credit card company for a credit limit increase. Sometimes they will do so without needing a formal application or inquiry.
Hold Off On Applying For New Accounts (Hard Inquiries)
When you apply for new loans, lines of credit, or credit cards, lenders and card companies will check your credit score. They will normally do so with a hard inquiry, in which they pull your score from the credit bureaus. This will have a temporary negative effect on your score.
When you’re trying to improve your credit score, avoid going through hard inquiries. Whenever possible, make do with the credit you already have. Or, try to see if you can have credit limits increased for existing accounts, without going through a hard inquiry.
Small Tricks For Boosting Your Score
- Some credit bureaus offer programs to improve your score. For example, look into Experian Boost, which searches your bank statements for positive additions to your credit report.
- Becoming an authorized user for someone else’s account gives you an easier method for improving your own score.
Maintain A Good Score Going Forward
After you’ve improved your score, the easiest way to move forward is to avoid falling into the same situation. Monitor your credit accounts closely and avoid taking unmanageable debt. You can also use many of these tips after you’ve improved your score and enter a better range. By habitually taking advantage of these tips, you can keep your credit score higher.
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June 28, 2021 at 3:43 pm
I’ve also heard it’s a bad idea to continually check your credit score as it could decrease.