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How to Fix Your Bad Credit Score

A lot of thought revolves around the words “credit score” nowadays. A person’s entire financial life revolves around it. When handled well, it can prove to be a boon but can quickly become a bane when mishandled.

It is vital to monitor your credit score, to either manage it consistently or repair it when the need manifests itself. The sooner a bad credit score is repaired, the better, since it is a critical financial number that represents you and can and will impact your life.

What is a credit score?

A credit score is a three-digit number that tells a lender, or a creditor, all that they need to know about your financial behavior. The credit scores may fall somewhere between 300 and 950.

It sheds light on how likely you are to repay a loan or make timely payments. This becomes the major factor for a lender to accept or deny a loan or a credit application.

Banks and other lenders consider people with low scores as high-risk customers and may deny credit.

Why is there a credit score?

The poor credit scores in a person’s credit report are red flags for banks and lenders. It helps banks to avoid lending money to people who are already in too much debt, or people who have a history of non-payment.

In the olden days, banking was a personal experience. Money was lent against collateral, and everything was a secure process. However, as usage of credit cards increased, unsecured credit became common.

Though banks make a profit through unsecured lending, it is also a high-risk process. There may be cases where it might become difficult to recover the money lent.

The credit report system minimizes this risk by giving banks the access to a centralized source of information about people and their financial health.

What information does the credit report contain?

Your credit report is your financial identity. Apart from having general information like your name, address and Social Security Number, it has information about your financial life.

It has information on your payment history, borrowing, open credit accounts, and so on. The information in the credit report mainly comprises of:

  • Credit Inquiries: approval or rejection of credit applied for
  • Loan accounts: information about the lending bank, amount, time, amount payable monthly and payment history
  • Credit Card information: Issuing bank, credit limit, date of issue, payment history and the balance on the account as in the recent statement
  • Closed Accounts: Even after payments have been made and accounts closed, the information will remain on the report for up to seven years.
  • Collection Accounts: If the bank has charged off an account, and has sold it over to a collection agency, this information will also appear on the report
  • Public records: Liens, court judgements, and bankruptcy will also be a part of the report
  • Comments: comments can be added either by the customer to explain records, or can be added by the creditor as well

What happens when a person has a Poor Credit Score?

A person’s credibility as a borrower is in question when he/she has a poor credit score. Banks and creditors will think twice before extending a line of credit. Even if they do approve the credit, there may be a higher interest rate that will be charged to you and no one wants that.

It might be difficult to get a place to live in, find employment, rent a car, or get a cell phone, if the credit score is low since so many entities check your credit score. People with a bad credit score might also need to pay security deposits for services and utilities.

Insurance might become expensive due to higher premiums. Debt collectors might call and harass you constantly to recover payments. Overall, a bad credit score will undermine your quality of life.

How to Fix Your Bad Credit Score

How to Repair Bad Credit

Repairing credit is like losing weight. It cannot be done overnight. If shortcuts are used to repair credit scores, it could up costing you more and only delay a real solution to this issue.

Any company, or thing, that claims to repair your credit fast might come with more bad news than anyone would care to anticipate.

Maintaining a good credit score, or rebuilding a positive credit score involves managing credit responsibly over a period of time.

If the score has gone down, then the credit history must be checked and repaired.

How can a person fix Bad Credit?

The first step to fixing a bad credit is to understand the various components that give rise to it.

The best way to do it is to first order a credit report from one of the three Credit Reporting Agencies: TransUnion, Experian, and Equifax, and going through it. Once the various components are understood, Credit repair is then a matter of planning and skill.

Step 1: Understanding. Planning and Tips

Some of the elements on the credit report, which lead to the calculation of the FICO score are:

Payment History

This component contributes to 35% of your FICO score, and has all the information about your payment history on loans and lines of credit.

This component has the highest weightage on the credit report, and can make a huge difference to the credit score. However, negative comments related to missed payments, or delayed payments cannot be removed easily.

Tips to manage Payment History

Pay your bills on time. A delay of even a few days on a bill payment can negatively affect your credit score.

Paying back after missing a few payments can help make a positive difference to the score. If you pay consistently, the fact that you missed a few payments, or paid them late, will slowly fade away. The positive information will be testimony that you are now managing your credit well.

Pay off a collection account. But remember that the comment might stay on, for up to 7 years. Closing the collection account does not mean removal of the negative comment.

If you cannot make payments, instead of defaulting, contact your creditor, or a credit counselor, who can work something out, so the money can be recovered.

Amount Owed

This contributes to 30% of the weightage in the credit report. There are several tips that can be followed to better manage this section and to increase your credit score.

Pay most of the amount on the “outstanding balance” on credit cards. High debt can decrease credit scores.

Do not close unused credit cards, if you don’t have to. If there is an annual fee involved, please request for a plan that has no annual fees.

Do not open new lines of credit to increase your available credit limit.

Length of Credit History

If you are a new credit user, do not open too many new accounts in a short period of time. This will not only look risky but will also lower your FICO score considerably since the average account age gets lowered.

New Credit

Try and keep credit inquiries to a minimum. If you are doing rate shopping, try and finish it within a fixed time. Too many inquiries might also reduce your credit score.

Opening new credit accounts, and paying them off can slowly increase your financial credibility, even if there have been problems in the past.

Do not open new accounts only to have a credit mix. This might probably lower your score.

Public Records

Avoid getting public records into your credit report like liens, bankruptcy, or credit judgments. These can keep your score down for years.

Step 2: Identifying Errors in the Credit Report and Disputing Them

After understanding the above components, look for errors or inaccurate information. Mistakes might occur owing to the same last name, first name, and so on.

  • First check the credit report to verify if your name, Social Security number, address and credit history is right.
  • Review the list of outstanding debts, credit cards, and purchases. Highlight mistakes if you find any
  • If the mistake must be disputed, proof must be submitted. Gather all required proof.
  • A dispute can either be submitted online, or a letter can be written, along with all proof enclosed, and sent to the credit reporting agency whose report has the incorrect information.
  • The reporting agency has 30 days’ time to respond to the dispute from the date of receipt of the dispute.
  • Follow up with the agency judiciously.

Step 3: Corrective Action

After the errors have been corrected, it is time to assess if the scores are less because of your spending pattern.

Are you spending more than you can afford?

Having a budget, which lists out your income, and your expenditure for each month can help you plan your spending. Having a budget will not only help you plan the spending but might also help curb any impulse buying you may have in your system.

Step 4: Payment Agenda

Fixing/repairing bad credit means paying all the outstanding bills, before time. Setting reminders to make payments on time can help.

Another option is to authorize banks and lenders to automatically debit money from your bank account, to not miss any payment.

Paying bills, and on time, is one of the most effective ways to increase your credit score.

Step 5: Reduce Debt

Pay down the outstanding balances on your credit cards. Know your credit limit, and try and stay within those limits while spending.

Even after you finish paying these cards do not cancel them. The total amount of available credit makes a difference to the credit score, even if there is no outstanding balance.

Another way to do this is to check the list of all credit card accounts from the credit report. Check the interest rates on these cards. Start by paying off the cards that charge you a higher interest rate, while paying the minimum balance on the other cards.

Step 6: Do not Open New lines of Credit

Do not open new lines of credit, even if they come coupled with offers. Each time a person applies for credit, there is a “hard inquiry” that goes on file. Too many such inquiries within 2 years might pull down the credit score considerably.

It is very important for people to know their credit score, to know where they stand, as far as their financial health is concerned.

Free tools like freecreditscore.com send e-mail alerts to inform people using their site about change in credit scores.

Monitoring the credit score regularly can help people identify inaccuracies, and take corrective action sooner than later.

The steps mentioned above should help people repair their credit, and start building a positive credit history. However, even with all the tips mentioned above, if people are struggling to get a credit card or loan, there are a couple of other options.

  • You can become an authorized user on someone’s account, like your father’s, mother’s, spouse’s,
  • Have a cosigner to work with you. However, the flip side is that the cosigner also becomes liable for your debt.
  • Opening a secured account. This is more like a debit account, where you deposit a certain amount in the account, and the card issuer allows you to borrow up to a certain percentage of money.

Despite these steps and options, if you are still struggling, getting assistance from a credit counseling agency would be better.

What are Credit Counseling Agencies?

An approved credit counseling agency can help a person pay down debt, and help him/her manage their finances. Their main objective is to help the borrower avoid bankruptcy. They also educate the borrowers on basic financial management.

They sometimes negotiate with creditors, to reduce the interest rates and late fees for the borrowers. The US Department of Justice has approved several credit counseling agencies in each state. This ensures that the people are taking assistance from legitimate agencies.

Managing a good credit score is a lifelong exercise. If, however, the scores have been affected, due to various reasons it is never too late to repair them. You can repair your credit yourself or hire the expertise of a credit repair company. A fixed/repaired credit is better than a bad credit, any day, both for the borrower and the lender.