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How to Fix My Credit
By Stephanie Colestock MONEY RESEARCH COLLECTIVE
Our credit plays a notable role in many aspects of our financial and personal lives. Without a healthy credit score, we may struggle to take out loans or get approved for the credit-based accounts that we want. Our credit history can also affect the loan terms we’re offered, resulting in lower interest rates for borrowers with better credit, and high-interest products for those with bad credit. The scores from the three major credit bureaus can even affect how much you will pay for insurance and be a determining factor in a landlord’s decision on whether to rent to you.
Understanding and appreciating the significance of your credit is the first step, but actually building a strong credit score is another task altogether. Here’s a look at what you can do if you have fair or bad credit, either due to a scanty credit history or negative entries on your credit record.
Table of contents
How to fix your credit
In order to fix your credit, it’s important to first understand what makes up your credit in the first place.
Your individual credit report is a ledger of sorts that’s maintained by the three credit reporting agencies: TransUnion, Experian and Equifax. This report lists the accounts you’ve had with creditors and lenders over the last seven years, including a detailed rundown of your
- payment history
- credit limits
- current balances
- original (or highest) balances
- when the accounts were first opened
It also shows any new accounts you have opened (or tried to open) recently, by listing all of the hard inquiries you’ve acquired in the last two years.
All of this information is then used to compute your credit score — which is actually a misnomer, as one person can have literally hundreds of scores, depending on the formula or model used.
Your credit score is a number that gives lenders and potential issuers an idea of how well you’ve paid your credit accounts in the past, and whether you’re likely to responsibly manage accounts in the future. This enables them to make an informed decision when you’re applying for a car loan, opening a new credit card, getting a mortgage, taking out a personal loan, or refinancing your home.
Credit scores often range from about 300 to 950, though this can vary between FICO scores and VantageScores, as well as individual scoring models. The higher the score, the more creditworthy the borrower appears. If you have a score lower than 600 or so, it may be time to consider making some credit repair efforts.
Check your credit report
Before you can fix your credit, you need to know where your credit stands (and why). This means requesting and looking over your credit report.
Getting a credit report from each of the three credit agencies is fairly simple, and adults are entitled to one free credit report annually from each bureau. To get a free copy of your annual credit report, you can visit AnnualCreditReport.com; just note that this is the only government-approved website for free credit reports, so watch out for lookalikes and scams!
Once you have your credit report(s) in hand, scan through each line item thoroughly, focusing especially on the negative items that come up. Look for any errors that may exist, such as late payments that were actually made on time, reported accounts that don’t belong to you, incorrect credit card balances or errors in your name or address.
Dispute any errors in your credit report
If you find any incorrect information, you should dispute it immediately. All three credit bureaus offer an easy, online dispute process, allowing you to contest the error through the agency (or agencies) directly.
If you have any supporting evidence — such as a payment confirmation — you can provide it when disputing information on your credit record. Otherwise, the bureau will reach out to the reporting creditor to verify the debt and the report.
You can also reach out to the creditor directly to see if they will correct the error on their end. In some cases, this can be even faster than disputing it through the bureaus.
Pay off any bills that are late or past-due
Payment history accounts for 35% of your FICO credit score, making it the greatest single factor of your credit. Your credit report is notated each month that your payment is late, with 90- or 120-day late payments having a significantly greater effect on your score than 30-day late payments.
If you have accounts that are currently overdue, one of the most important first steps you can take is to get them current. This will prevent additional missed payments from being reported on your credit, and also save you from late fees and penalty interest rates.
Pay subsequent bills on time
Moving forward, do everything in your power to make at least your minimum required payments on time each and every month. Autopay can offer a safety net so you don’t forget your due date. If you’re struggling to make minimum payments due to financial hardship, contact your lender to see what options they are willing to offer.
Even a single late payment can knock your credit score by tens or even hundreds of points. By paying your bills on time, you’ll see your score continue to grow from one month to the next.
Maintain a good credit utilization ratio
The next-most-important factor in your credit score is how much of your credit you’re actually using. This accounts for 30% of your FICO credit score and can be a great place to start when fixing your credit.
Called your credit utilization ratio, this number tells lenders how much debt you’re carrying compared to your available credit limits. If you have a $9,000 balance on a credit card with a $10,000 limit, for example, your credit utilization ratio is 90%.
Why does this matter? Well, borrowers who are carrying high balances on their accounts may be doing so because they’re financially overextended. This makes them appear to be a greater risk to lenders. Most lenders want to see an overall utilization of about 35% or less; the higher this number, the greater the effect on your score.
If you currently have a high credit utilization ratio, lowering this percentage can help boost your credit score quickly. One way of doing so is by simply paying down your balances, if at all possible. This will drop your total owed and lower your utilization for that account.
Ask for a higher credit limit
Another way to reduce your credit utilization is to simply ask for a higher credit limit. A $9,000 balance on a card with a $10,000 limit is a 90% utilization. That same account with a new $20,000 limit, however, would equate to just a 45% utilization… even though the same amount of money is still owed.
Call and speak with your credit card companies and any lenders you owe money to. Ask if they’d be willing to increase your credit limit. If you have a positive payment history, they may say yes.
Apply for a credit-builder loan
A credit builder loan is a type of reverse loan, where borrowers make monthly payments but don’t receive their funds until the end of the loan period. These loans are designed to — as the name implies — help build the borrower’s credit and may have a much lower credit score requirement to qualify.
With credit builder loans, borrowers get approved for a small personal loan, which the lender will then set aside on their behalf (rather than disbursing the funds). The borrower will then make monthly payments on that loan as scheduled, and the lender will report those timely payments to the credit bureaus. Once the loan is repaid, the lender will make those funds available to the borrower (who now has a history of installment loan payments under their belt).
If you don’t yet qualify for a typical personal loan or want to build your credit history before applying, consider whether one of these loans could be the right choice for you.
Summary of how to fix my credit
As with most things in life, a good credit score can take many years to build, but just days to destroy. If you have fair or poor credit, or a meager credit history, fixing your credit score could be necessary before you buy a home, open a new credit card or try to refinance your student loans.
In order to fix your credit, you’ll first want to gauge where your credit stands (and why). If there are any errors, now is the time to dispute them; if there are accounts in poor standing, make an effort to bring your payments up-to-date.
Once you have corrected any outstanding issues, continue to build a positive credit history by making payments on time, watching your credit utilization ratios, and only applying for new credit when you need it. All of this will help you demonstrate your creditworthiness to potential lenders, as well as continue to build your best credit score possible.
Stephanie Colestock is a DC-based personal finance writer with nearly 11 years of freelance writing experience. She covers a wide range of finance-related topics and is currently working toward her CFP®️ certification. Her work appears on sites such as Business Insider, MSN, Fox Business, CNET, Investopedia, and more.