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Fixing your credit can be a daunting task. However, understanding your financial situation and options are key. We know there's lots of information out there about credit, so it's tough to know where to start. Fortunately, we’ve compiled a step-by-step list to help you learn how to improve your credit.
Your credit score shows your creditworthiness to lenders, ranging from 300 to 850. FICO® and VantageScore® are the two major companies that give credit scores in the U.S., and both of these scores are calculated based on factors like your payment history and credit utilization. A good credit score is generally anything 670 and above. Meanwhile, anything lower than 670 could be considered risky and in need of improvement.
Below are the five main factors that affect your credit score:
Checking your credit score regularly will help you understand your credit position and what potential lenders are looking at and looking for.
A credit report is a statement of your overall financial health. It includes identifying details, account history, payment history, loans and relevant public records. Most people check their credit report when they’re preparing for big purchases. However, checking your credit report more frequently can help you get ahead of potential issues.
Occasionally, errors may come up on your credit report. Mistakes may include payments falsely labeled as late, closed accounts shown as open, inaccurate negative items and duplicate accounts. Luckily, you can dispute these errors with proper evidence.
Making sure that the information on your credit report is accurate can catch errors and help prevent significant drops in your credit score. An error found in a category like payment history, for example, which accounts for 35 percent of your credit score, could be the reason for a large drop in your score. Possible errors in this category can include inaccurate negative items that can stay on your report for seven to 10 years if gone undetected.
There are numerous ways to check your credit report with the help of trusted sources like verified websites, credit card lenders and government entities. It’s important to use safe and reliable sources since your personal information will be given and displayed in the report. The government entitles you to three free credit reports each year, one from each of the three major credit reporting agencies: Equifax®, Experian® and Transunion®.
It’s vital to dispute errors you find as you’re reviewing your credit report. Thanks to the Fair Credit Reporting Act (FCRA), you’re encouraged to dispute inaccurate information. The FCRA defines the rights you have over your information and makes sure that you have a say on financial actions regarding your credit.
There are a few steps you must follow to dispute errors on your credit report. The first step is to contact the credit reporting agency. After identifying the errors, you must gather verifying evidence. Then, you’ll close out the process by sending a credit report dispute letter and waiting for a follow-up from the credit reporting agency.
| How to dispute errors on your credit report step-by-step | |
| Step 1 | Identify errors |
| Step 2 | Gather verifying evidence |
| Step 3 | Send a credit dispute error |
| Step 4 | Allow time for investigation and follow-up |
Paying bills on time has a direct impact on your credit score, since payment history makes up 35 percent of your score. Late payments will lower your credit score and may be followed by late fees.
Setting up automatic payments is an easy way to stay current with your bills. As long as you have enough cash in your account, you'll stay current with your bills without having to lift a finger.
Making the decision to go paperless could even result in discounted rates depending on your provider. If you wish to manually control bills, you can review upcoming due dates to set reminders or add them to your calendar.
Consequences of late payments depend on your lender’s policies. Some lenders may initiate late fees immediately after you have surpassed the deadline, but late fees often vary depending on the details surrounding the specific payment. After the 30-day billing cycle is up, the lender will report past due bills as delinquent to the credit bureaus. Once the bill has been reported, it will appear on your credit report and will likely cause your credit score to drop.
If you know you can’t make a payment on time, you can reach out to your lender before the due date to give them a heads up. The lender will still need to collect the payment, but they may offer assistance. Occasionally, if you have a good payment history, a lender may extend your payment deadline. Understanding your financial situation and obligations before due dates arise gives you the opportunity to ask for assistance and plan accordingly.
When you’ve missed multiple payments, your lender may send your account to collections. A collections agency is a third-party vendor that will attempt to contact you and collect the debt.
Debt is categorized by how late the payment is—either 30, 60 or 90 days late. A collections account can stay on your credit report as a derogatory mark for up to seven years. Any derogatory mark, including a collections account, will raise red flags to current and future lenders, and your credit score can take a serious hit.
A charge-off occurs when debt has gone without any payment for around six months. The lender will close the account, mark the debt as uncollectible and claim the debt as a business loss on their taxes. Even though the lender closed the account, you are still responsible for paying debt back to them or the collections agency that may have taken over your account.
A charge-off is a clear indicator that you've had trouble paying off your debts. Due to the severity of this situation, a negative mark will be left on your credit report for seven years and your credit score can be significantly affected.
Pay for delete letters are a negotiation tactic you may be able to use with a collections agency. This letter asks collection agencies to remove negative information from your credit report in exchange for agreeing to pay off your debt in full.
The collection agency may require you to pay more than you owe. They also aren’t obligated to follow through with the deletion. For this reason, it’s better to pay off bills and debt on time to prevent negative marks in the first place.
Debt consolidation is when you combine all your debt into one payment with a lower interest rate. This process allows you to pay off all of your separate debt with one lender. Consolidating your debt can make it easier to keep track of payments since you only need to worry about one payment. You can also potentially pay off debt faster if you can get a lower interest rate.
There are numerous types of debt consolidation, like debt consolidation loans, home equity loans, savings funds, debt management programs and balance transfer credit cards.
For example, a balance transfer card is commonly used by people wishing to transfer their debt onto a credit card with zero percent APR for a specific time. This option can make a significant dent in your debt’s principal balance due to the no-interest months.
Understanding all of your options and finding which one works best for you will help make this process smoother.
Your credit utilization rate is the ratio of your revolving credit over your total available credit, and accounts for 30 percent of your credit score. Your credit utilization rate has a large impact on your credit score, which is why keeping this rate low will keep your credit score high. It’s commonly suggested to keep your utilization below 30 percent of your available credit. For example, if your total credit limit is $3,000, you’ll want to use $1,000 or less.
Improving your credit utilization rate is an easy and efficient way to improve your credit score. The most straightforward way to do so is by paying down your current balance because it makes up half of your credit utilization calculation. Two other ways to influence this rate are to increase your credit card limits and to obtain a new credit card.
Increasing your credit limits is when you request to increase the maximum amount you can spend on your credit card. When you request a credit increase, you may see multiple benefits, like a lower credit utilization rate and more options for larger purchases.
However, there is also a downside to this option. It’s possible that a credit increase may trigger a hard credit inquiry, which can temporarily lower your credit score. A credit check may be completed by a potential lender to determine if you are capable of handling the credit increase. Luckily, it’s easy to recover if you are keeping up with payments, keeping your utilization rate low and properly managing your finances.
While the increase itself doesn’t affect your credit score, what you choose to do with it can. Choosing to increase your spending can increase your credit utilization rate and in turn deflate your credit score. Paying your bills on time will show lenders that you are capable of responsibly handling a credit increase.
Opening a new credit account may cause your credit score to slip at first. Card issuers will perform a hard inquiry while deciding whether to accept your application. Credit age will also decrease because the new account lowers the average age of your accounts slightly.
However, there are many benefits to opening a new credit account. It can increase your credit limit, lower your credit utilization rate and can improve your credit mix.
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Due to the negatives and positives that come along with opening a new credit card, it’s important to evaluate your personal financial situation. Having another credit card will diversify your credit mix, but make sure you can handle higher limits with a new card.
If you’re denied a new credit account, you should request a free copy of your credit report from whichever company issued it. You can obtain your credit report for free from any of the three major credit bureaus. If you’re requesting a credit report due to a denied account, however, you’re only entitled to obtain the report from the same company the lender used.
Once you have your credit report, you should check for errors like inaccurate negative items, missing information and other concerns that may be the reason you were denied a new account.
Applying for new loans, credit cards and other lines of credit can affect your credit score by initiating new credit inquiries and lowering your account age. Before applying for new credit, it’s a good idea to check your credit report. While checking your credit report is encouraged, there are instances where it can lower your credit score.
A soft credit check is when you check your own credit report, it’s checked by an employer or when a creditor is preparing to send you a pre-approval offer. Employers will need your written permission to view the report, but creditors do not. These checks do not affect your credit score.
A soft check will stay on your credit report for up to two years and will appear in the soft inquiries category. It shows open loans, open lines of credit, payment frequency, accounts in collections and other public records under your name.
A hard credit check happens when you apply for major financial transactions like a loan or mortgage. You must permit a financial institution to view your credit report before they do a hard check. Since you are requesting funds that will accumulate debt, a hard credit check does affect your credit score.
If you’re in need of a soft or hard credit check, there are steps you can take to minimize its effect. Researching credit cards that you’re interested in before making a decision will give you the best chances of getting a desirable card and will prevent you from applying for too many cards at once, which could lower your credit score.
Paying off your debts can improve your credit and remove unnecessary interest fees from your plate. Payment frequency and history are significant factors that affect your credit score. Paying off your debt will positively impact credit utilization, payment history and other areas within your credit report.
Repayment strategies like the debt snowball and debt avalanche have been effective for people trying to pay off debt:
Both of these methods allow you to pay off debt faster, which will in turn boost your credit score.
Many of us have multiple credit cards, but do you know how long we should keep them open? Keeping your old credit cards open can improve your credit age. It’s commonly suggested to keep your oldest credit card account open because it has the longest history attached to it.
Keeping an old account active may drive you to spend too much money or may rack up too many annual fees. In that case, closing it may be the best option. But if the account sits on the sidelines, then keeping it open can be a wise strategy to avoid a decrease in average credit age and an increase in your utilization rate.
Multiple credit cards can also improve your credit score by diversifying your report. This will show lenders that you can handle multiple types of credit accounts. Occasionally, people find specific uses for different credit cards.
Giving an old or rarely used credit card a specific purpose will protect your credit from possible closure of an inactive account, which will lower your credit age and score. For example, you can use an old credit card only to pay off monthly streaming bills to keep it active.
When deciding to close an account or not, it’s important to weigh the pros and cons to see which decision works best for you.
There is no real answer to how long it will take to fix your credit—the length of this process depends on your situation, like how much debt you have and what your current score is. If you need to fix your credit score, you should begin the process now to prevent unnecessary delays.
You can maintain good credit by paying your credit card bill in full every month, keeping your spending low and staying on top of your credit report and score. Luckily, there are multiple ways to maintain good credit:
If you’re in the process of paying off debt, consider utilizing debt counseling, credit monitoring and fraud alerts.
Credit repair companies can be helpful if you’re trying to maintain or improve your credit score. These companies provide online credit evaluations, negative item summaries, recommended credit solutions and help dispute discrepancies.
Credit repair companies are legally bound to abide by the rules of the Credit Repair Organizations Act. The FTC wrote this act to prevent scams and make sure that credit repair services are legitimate and trustworthy.
The credit repair journey can be daunting for anyone. Following step-by-step guidelines from trusted credit repair companies can help guide you through your credit repair journey. CreditRepair.com offers services and resources to help you achieve your financial goals.
