Raise your hand if you’ve ever struggled with finances. That makes two of us. Almost everyone has first-hand knowledge about dealing with a bad credit score.
Credit scores affect many areas of our lives, from renting to buying a house or a car to starting a business. Some employers now include credit checks as part of their hiring process — especially for jobs that involve finances.
The good news is that having a low credit score is fixable. However, repairing your credit won’t be a walk in the park.
Key Takeaways:
- Improving your credit score is a process that takes time.
- One of the first steps toward improving your credit score is requesting and understanding your credit report.
- Anyone can improve their credit score if they know how and stick to a plan.
How to Repair Your Credit Score
Repairing your credit score is a slow process that requires careful planning, smart financial decisions, and commitment. Here are practical steps you can follow to help you repair your credit score:
1. Pay Off Your Debts
Timely debt repayments make up about 35% of your credit score. It can be challenging to manage debts, especially with inflation. Thankfully, these budgeting methods can help you stay on top of your repayments:
The 50/30/20 strategy splits your income into three categories:
- 50% is allocated to essential needs, which include food, water, clothing, and shelter.
- 30% goes toward wants. Examples are getting a new phone or laptop when it’s not necessary.
- 20% is for savings and debt repayment.
Here’s how it works: If you make $5,000 a month, $1,000 (20%) should go toward repaying your debt, $2,500 can meet your essential needs, and the remaining $1,500 can be used for other things you want.
The zero-based budgeting system ensures you only spend what you earn or on necessary things. Zero-based budgeting will also help you identify areas in your day-to-day life where you can cut costs and put more money into paying your debts.
Apps like Good Budget, Monarch, YNAB, or Simplifi can help you track your budget and ensure that every dollar goes where it’s most needed.
To stop missing payments, set up automatic payments on your credit card. That way, the fee will be deducted on the due date whether you remember or not. Additionally, you can set calendar reminders a few days before your bill’s due date to avoid missing your payments. Also, consider available options for writing off your debt.
2. Request Your Credit Report and Verify Your Credit Score
Your credit report is your financial identity. It contains a breakdown of your credit accounts. Negative information typically remains on your credit report for seven years; however, certain bankruptcies can stay for 10 years.
To better understand how to fix your credit score, request your credit report at least once a year to monitor your credit score.
Also, regularly review your credit report to catch errors that may reduce your credit score. Such errors include a wrong name or address or an incorrect payment date.
To request your credit report, follow these steps:
- Get your free credit report from any of the three major credit bureaus — TransUnion, Experian, or Equifax. AnnualCreditReport is the official website authorized for free credit reports under federal law.
- Review the report for errors, like misspellings in your personal information, listing debts multiple times, or late payments for loans you’ve already paid.
- Calculate your FICO score to check what you need to focus on. For instance, if your credit score is in the 500 range, you may need to focus on reducing your credit utilization rates and paying off high-interest debts.
3. Dispute Errors on Your Credit Report
44% of respondents in a recent Consumer Reports survey found errors on their credit reports. Mistakes in your credit reports can harm your credit score. Common credit report errors include:
- Incorrect personal information, like mistakes in your name or address.
- Inputting someone else’s report as yours or mixing them up.
- Showing late payments for loans you paid off at the correct time.
- Listing a particular debt multiple times.
Even though these mistakes may not be your fault, they can still affect your credit score, so report them immediately to the credit bureaus.
Here’s how to go about it:
- Contact the credit bureau online through their official websites and be ready to attach evidence to support your report claims (e.g., bank statements, payment receipts, or identification cards).
- The credit bureau usually takes between 30 and 45 days to process the dispute, investigate, and correct the error, so monitor the progress of your dispute closely.
- The timeframe for fixing a credit dispute varies depending on the credit bureau. Feel free to follow up until you see changes.
4. Get a Secured Credit Card
Here’s how to build credit fast: own a secured credit card.
A secured credit card may help you build a positive payment history because the initial cash you deposit becomes your credit limit.
For this method to work, make sure to register with a credit card company that requires a low initial deposit and reports all financial dealings on credit cards to any of the major credit bureaus.
Here’s how a secured credit card works:
- You deposit a set amount (e.g., $500), which becomes your credit limit.
- You use the card for small expenses, like groceries and gas, and pay off the balance in full every month.
Ensure you only make small purchases on your secured credit card and fully pay all outstanding debts. This will show a responsible card usage history and a positive debt repayment record. Eventually, your credit score may improve.
5. Become an Authorized User on a Family Member’s Credit Card
If you have a friend or relative with a high credit score, becoming an authorized user on their credit card is a simple but effective way to raise your credit score.
As long as their account is in good standing, their positive credit history will reflect on your credit report. And the best part? The account holder doesn’t have to give you their credit card or account number to improve your credit score.
6. Keep Your Old Accounts Open
The longevity of your accounts also contributes to the length of your credit history — which makes up around 15% of your credit score.
So, when you close an old account and deactivate the linked credit cards, it tends to negatively impact the credit score you’ve built over the years.
In light of this, even if you’re no longer using an old account, keep it open and occasionally use it for small purchases, but make sure to pay it off on time. This way, you can keep your accounts active and help to raise your credit score.
7. Monitor Your Credit Utilization Ratio
Your credit utilization ratio is the percentage of your available credit that you’re currently using. Aim to keep your CUR under 30% to improve your credit score.
Reducing your credit utilization ratio can raise your score into the “fair” credit range (580-669) or even the “good” credit range (670-739).
For example, if you have a $5,000 credit limit and your current balance is $1,000, your credit utilization is 20%, which is considered good. But if you can reduce your balance to $500, your utilization rate will drop to 10%, likely raising your credit score.
Here’s a pro tip: Set reminders to review your credit card balances before your billing cycle ends to ensure you’re keeping your credit utilization ratio low.
8. Focus on Paying Off High-Interest Rates First
When paying off debts, focus on accounts with the highest interest rates first. This helps reduce interest charges and allows you to pay off balances faster.
Once you’ve paid off the high-interest account, transfer the money you used for that payment to the next account on your list.
Sounds simple, right? This method is known as the debt avalanche method, and it can help you manage and reduce your debt over time.
9. Get an Instant Score Boost if Possible
Credit bureaus like Experian can help you increase your credit score with instant score boosts.
Here’s how it works: You share information about your finances, like your utility bills, telecom payments, and even digital entertainment payments like what you spend on Amazon Prime and Spotify. Then, the credit bureau will scan your account for proof that you’re financially responsible based on how regularly you make those payments.
After they scan your account and confirm that you manage your finances well, they may give you an instant score boost.
Having a poor credit score is more common than you might think. And as the old saying goes, there is no problem without a solution. With the proper steps and commitment, improving your credit score is something you can achieve. Following these steps to repair credit will help you regain control of your finances and create a stable financial future.
FAQ
How Does a Credit Score Work?
A credit score is a three-number score that provides a snapshot of your creditworthiness and how well you manage credit and debt. The number is from 300 to 850. A good credit score should be 670 and above.
What Are the Causes of Bad Credit Scores?
Understanding the causes of a low credit score is the first step to figuring out how to repair credit fast. Here are the four major reasons credit scores drop:
Missing or late payments – Paying bills late consistently or missing payments is one of the most common reasons credit scores drop.
- Filing for bankruptcy – Filing for bankruptcy can cause your credit score to drop by 100 to 200 points. The bankruptcy will also remain on your credit report for seven to 10 years — during which it may be challenging to receive even bad credit loans or rent a home.
- Account Charge-Offs – If you don’t make due payments on an account for some time, creditors may “charge off” the account. This means the creditor has given up hope of you paying back the money.
- High credit utilization rate – Your credit utilization rate is the percentage of your available credit that you’re using.
What’s the Quickest Way to Improve Your Credit Score?
The fastest way to boost your credit score is by addressing high credit card balances. Reducing your credit utilization ratio, which is the amount of available credit you’re using, can significantly improve your score. Aim to pay down your balances to below 30% of your credit limit, or even lower if possible. Additionally, make sure you’re paying all bills on time, as even one late payment can hurt your score. You can also consider requesting a credit limit increase, which can instantly lower your credit utilization if you maintain the same balance.