Your credit score is a critical part of your financial world. Good credit is essential when you want to make major purchases like a car or a house. And bad credit can also affect the rates you pay when taking out loans for any reason. So you need to keep on top of your credit score and do everything you can to push it as high as possible.
Unfortunately, people often find themselves in situations that damage their score, sometimes through no fault of their own. Pandemic-related layoffs, for example, made on-time credit card payments difficult for many. But damaged bad credit is not the end of the world. There are steps you can take — from monitoring your credit report to using a secured bad credit card — to repair your score.
1. Know What Is Dragging Your Score Down
One of the first steps you should take to improve your credit is reviewing and understanding your credit report. Many people do not even realize how much they have. (Remember that store card you applied for to take advantage of a deal and haven’t used since?) Inspecting your report gives you a comprehensive overview of your credit situation. You know how much and what types of bad credit you have, how much you are using, whether you have late payments, and more.
You can get a free report from each of the three major bureaus (Equifax, Experian, and TransUnion) once a year. Through April 2022, you can check your report for free weekly at AnnualCreditReport.com. You should review your report periodically, even after you have raised your score to the level you want. Doing so allows you to keep on top of potential threats to your credit.
Identifying the specific issues that are lowering your score will help you prioritize what you do next. Address the most obvious problems quickly. For instance, if you find errors on your report, you should file a dispute with the appropriate bureau.
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2. Use Cards Designed to Help You Build Credit
Recognizing the problems many people have in strengthening their bad credit, some banks have begun offering secured credit or credit builder cards. These cards, which are backed by an initial deposit or funds transferred from checking, reduce the risk to card issuers. As a result, they are willing to offer cards to consumers with poor or no bad credit.
With such cards, you build your score by making small purchases and establishing a history of on-time payments. These timely payments are reported to credit bureaus, who reward your prudent credit management by boosting your score. Some issuers of credit builder cards forgo reporting credit utilization to the credit bureaus while still reporting on-time payments. Thus two parts of your credit score improve at once.
3. Pay Your Bills on Time
Because payment history accounts for at least 35% of your bad credit score, failing to pay your bills on time can drastically affect it. Indeed, a single payment that is more than 30 days late can decrease your score by as much as 100 points.
If you can’t make a payment on time, at least make your minimum payment as quickly as possible. The further behind you fall on making a payment, the worse the effect on your score.
Get as creative as you need to (within reason) in finding ways to make on-time payments. The Covid-19 crisis challenged many people’s ability to pay monthly credit card bills. Some responded by jumping into the gig economy. Taking advantage of freelancing opportunities provided a flexible income source to get them back on track.
4. Reduce the Amount of Credit You Use
Credit utilization — the ratio of credit you’re using to total credit you have available — accounts for up to 30% of your score. You should keep credit utilization under 30%, and ideally lower than that. And you need to consider both your total utilization and your per-card rate.
Let’s say you have three cards:
- One with a $2,500 limit and a $1000 balance
- One with a $5,000 limit and a $1,000 balance
- One with a $10,000 limit and a $5,000 balance
Your overall credit utilization is high at 40%. Furthermore, you have one card with a 40% rate and one card with a 50% rate. While you need to bring your overall rate down, you should target cards 1 and 3 first before tackling card 2. Doing so will allow you to bring your per-card ratio below the 30% threshold more quickly.
There is a constant debate about which cards to pay off first: those with a high outstanding balance or those with higher interest. If you want to improve your bad credit score, focus on those with the highest balances until you get your utilization rate under control.
5. Have More Than One Type of Credit
Your credit mix accounts for 10% of your FICO score, so having and appropriately using different types of credit can improve it. Two of the most common bad credit types are installment loans (e.g., mortgages, car loans) and revolving credit (e.g., credit cards).
With revolving credit, you can continually incur debt by buying more than you pay off every month. Therefore, your revolving credit paints a clear picture of how responsibly you use bad credit. Keeping current with your installment loans shows that you can deal consistently with long-term debt. So each type of credit impacts your score differently.
While credit mix is important, avoid overextending yourself with credit accounts. Making on-time payments is more important to your score — and overall financial health — than having a large number of different accounts.
6. But Don’t Apply for Too Much Credit or Apply Too Often
Most consumers are awash in credit opportunities. It seems every time you go into a store or buy something online, you get an offer for a new credit card. Taking lenders up on all these offers can hurt your score. This can be particularly risky for young consumers who are trying to establish credit but have little experience managing money.
Whether you eventually are approved for a credit card does not affect your score. Rather, it is the act of applying — which will result in a “hard inquiry” — that matters. Admittedly, the impact of new credit applications is small compared to other factors. Nevertheless, the worse your bad credit already is, the greater the effect will be.
Conclusion
With a little effort and ongoing diligence, you can recover from temporary hits to your bad credit score. And that same effort can help you avoid any similar problems in the future. The steps you take to repair your credit score can help you build a sustainable financial future.
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