Many doors are closed to you when you have bad credit. A credit score that falls below 600 may keep you from getting loans or force your hand at settling for less-than-desireable terms that end up costing you thousands of dollars. Truth is, many lenders are wary of those with average credit, too. Your credit score of 650 -699 will still require you to pay more interest while reducing your access to credit.
Most of us need to improve our credit score. Whether you move from ‘Poor’ to ‘Fair’ or ‘Fair’ to ‘Good’. And, if your credit rating is poor, it’s really important to work to improve the situation.
Rebuilding your credit, whether you’ve made some poor financial decisions, gone through bankruptcy, or fallen behind on compulsory payments, doesn’t have to be complicated. As long as you create a plan and exercise patience, you can rebuild your credit and obtain an excellent credit rating.
Step 1: Check and Regularly Monitor Your Credit Report
You need to know where you’re at financially and your credit report can give you that insight. Checking your credit report lets you see exactly where you need to make improvements. Do you have a lot of missed payments? Have you maxed out all your debt and/or credit limits? These items will help you figure out which problems to tackle first.
You are entitled to a free report from each of the credit bureaus once a year (so, three total). You can visit AnnualCreditReport.com (the official site run by the three credit bureaus) for your free reports. You can also order reports directly from each of the three bureaus:
Check your credit report for errors and fraudulent accounts as well. Errors can bring your credit score down. If something is inaccurate, dispute it, and fix the problem.
Step 2: Make Arrangements to Catch Up on Your Payments
Your payment history is the largest factor determining your credit score. If you are behind on your credit card or automobile payment, it will reflect poorly on your credit score. Try to bring your payments current, but if you can’t afford to bring everything up to date all at once, you will need to call your creditors to make a payment arrangement. Be up-front when you contact your creditors, explaining your situation and letting them know that you want to pay your obligation. Let your creditors know how much you can pay, and how long you expect to pay it. In many cases, it’s possible to work out an arrangement that all parties can live with.
You can also seek the services of a legitimate credit counseling agency to help you create a plan. The FTC has some good information on managing your debt and contacting creditors, and finding legitimate credit counselors.
Step 3: Make A Commitment to Pay Your Bills on Time
Going forward, pay your bills on time. Because the credit agencies view payment history as critical to your credit worthiness, establishing a reliable payment pattern is vital to rebuilding your credit. At the very least, you want to avoid reports that you are missing payments, or paying habitually late. Consider setting up automatic withdrawals in order to avoid missing payments in the future.
Step 4: Pay Down Your Debt
Credit agencies look at how much credit you’ve been issued by banks, consumer loan companies, departments stores, etc. and how much you actually have outstanding. If you’ve been approved for a total of $5,000 of credit from various financial institutions, but are only carrying $450 month-to-month, your credit ‘utilization’ is very favorable. If, however, you are carrying $4,950 of that credit from month-to-month, credit agencies see that as a negative sign.
Create a plan to pay down your debt a little faster. Honestly evaluate your expenses, and cut back. Use the money you save to reduce your debt. Try to get your credit utilization down to 30% or less. If you can reduce your debt, the credit utilization portion of your score will improve, and help your credit overall.
Step 5: Try To Get An Unsecured Credit Card
Before you do anything else, you should first determine if you could qualify for an unsecured card. Although they are typically harder to qualify for, they often come with the lowest fees and will save you from having to put down a deposit upfront.
If you’re worried about getting rejected and incurring a hard inquiry on your credit report, try prequalification first. As mentioned above, the Credit One® Unsecured Visa® Card offers a prequalification option. Just answer a few simple questions that will give you an idea of whether or not you can qualify before the actual application goes in.
Step 6: Go Secured For A Limited Time
If for some reason you can’t qualify for an unsecured credit card, we suggest getting a secured card. Remember, secured credit cards do not require a lifetime commitment. Even though you have to put down a deposit, you will ultimately get your deposit back if you pay your balance in full and on time. Once your credit score starts improving, you can simply cancel your secured card and apply for an unsecured credit card with better terms.
If you choose a secured credit card, make sure you get an updated credit score each month with your statement. For example, the One United Bank Unity Visa Secured Card provides your FICO score each month to help you see your progress. This will help you know when you are ready to apply for a better card that doesn’t require a deposit. Also make sure that you are utilizing your secured credit card as much as you can. If you want to begin building a credit history, you need to use your card frequently and prove that you can pay your balance in full.
Step 7: Practice Good Financial Habits
It can take 60 to 90 days or longer for you to start seeing improvement in your credit score. In some cases, depending on how bad the situation is, it can take two or three years to see solid improvement to your credit history. As a result, it’s important to change your financial habits so that you reduce the chances of poor credit in the future.
Develop the good financial habits of living within your means, setting aside money in your emergency fund, and saving for the future. That way, you’ll be less inclined to skip payments, and you’ll have something to fall back on if you run into financial trouble. Keep with the good habits you formed while rebuilding your credit, and it will be easier to maintain your new, better credit history.
Follow the steps listed above, and you will be well on your way to a credit score of more than 700. Don’t forget to show patience, though. Credit improvement doesn’t happen overnight. Depending on how bad your credit is, it can take years to achieve excellent credit. But, if you keep at it, you will be rewarded with better rates, and thousands of dollars in interest savings.