After your birthday, Social Security number, and cell phone number, your credit score is the most important number in your life.
Your credit score, known in the financial services industry as a Fico Score, is a snapshot of your financial history. The reason this number is so important is that it can determine whether you can get a loan for a house, car, or other essential purchase, and at what interest rate.
People with a good credit score, in the 670 to 739 range, are better able to qualify for a loan with a low interest rate, which is the amount of money you pay on a loan in addition to the amount of money you actually borrow towards your purchase, known as the principal.
The lower your interest rate, the lower your monthly payments, and the less money spent on your goal. Conversely, the higher the interest rate, the higher your monthly payments, and the overall loan.
If you have bad credit, typically 580 or less, it can be much harder to get a loan. Even if you are able to qualify for one, it’s likely to be at a much higher interest rate.
Fortunately, your credit score isn’t a fixed number, and there are steps you can take to repair it. We asked a few credit and financial experts for their tips on what you can do to get your score to a better place.
The first step you should take is knowing what your credit score is. For that, you’ll want to go right to the source. You can access a free copy of your credit report at AnnualCreditReport.com.
“Federal law gives you the right to get a free copy of your credit report every 12 months,” says Bill Hardekopf, a Senior Industry Analyst at CardRates.com. “However, during the pandemic, consumers can get a free credit report each week from all three national credit bureaus (Equifax, Experian, and TransUnion).”
Make certain to stick to AnnualCreditReport.com, cautions Howard Dvorkin, Chairman at Debt.com. “Don’t Google it and click the first few links. You’ll be taken to websites that try to sell you financial services. The only place to get free credit reports is AnnualCreditReport.com,” he says. “Everywhere else is trying to mine your data or sell you something.”
Your credit score is based on a number of factors, but the two most important ones are your payment history and your credit utilization ratio.
“Those are just fancy ways of saying, ‘Do you pay your bills on time?’ and ‘Have you maxed out your credit limits?,” says Dvorkin. “So if you don’t make late payments and if your credit cards have, say, $10,000 limits on them and you only charge half that, then your score will most likely be pretty good. The reason is simple: Payment history comprises 35 percent of your credit score, while credit utilization ratio is 30 percent. That’s nearly two-thirds of your credit score.”
Those two numbers will be your primary focus, as “all the other tips and tricks don’t matter much until you take care of these two things first,” Dvorkin adds. “Thankfully, it’s not hard to do both.”
Once you have a copy of your credit card score, take a look. It’s easy to not notice patterns when you’re just going through your day-to-day life, but when you have the numbers in front of you, you can figure out what you need to work on.
“You can’t repair your credit if you don’t know what is wrong with it in the first place. That’s like going in for surgery without first seeing a doctor,” says Hardekopf. “Take a look at your credit report and figure out where things went wrong. Did you get too far behind on your payments? Did you build up too much credit card debt? Did you have something repossessed or foreclosed? Only when you pinpoint this problem will you be able to take the necessary steps to correct it.”
If you take a look and are still not clear where the issue lies, you can always consult a local financial planner, or use a credit card repair service such as Lexington Law credit repair or Credit Saint credit repair to help you see what you need to work on.
The first step here is also the most important, according to Dvorkin. “First, just don’t be late with another credit card bill. Since the minimum payments often range between $20 and $35, it’s not hard to pay at least that amount by the deadline,” he says. “And if you’re bumping up against your credit limits but still making those payments, you can often call and get those limits nudged up a little bit.”
If you’re in a hole, stop digging. So if your credit isn’t where it needs to be, make paying your bills your first priority, so your score does not get dragged down further. Keep track of when your bills are due, and put those dates in a calendar so you do not lose track.
“Most businesses will not report a payment until it is 30 days past due. If you have any bills that are about to approach that mark, get them taken care of immediately,” says Hardekopf. “Also, if you have accounts that you have been consistently behind on, get them caught up so you don’t continue to build up bad credit. This is more of a preventative measure, but it will show positive payment history on your credit. That, in turn, could increase your score.”
If you’re having trouble making your monthly payment, take a look at your budget and see if there are any unnecessary expenses you can cut down on, such as going to restaurants instead of cooking at home, or buying items you don’t need, or at least don’t need at the moment when your priority needs to be on getting your credit score up. This is another area where a financial planner might be able to help.
Once you get a handle on making timely payments consistently, even if it’s only the minimum, start focusing on the outstanding balances you have on your credit cards. “Most people don’t realize that having high credit card balances can hurt their credit score,” says Hardekopf, who says that you need to keep an eye on the amount of debt you have in comparison to your overall credit limit.
“You need to keep this ratio below 30% to not affect your credit score,” he says. “That means if you have $10,000 in money available through your credit cards, you should have a balance of $3,000 or less.”
That ratio applies to every single card you have, not all of them put together. So even if two of your cards are not over the ratio, you would still have issues if your third one is. “So if you have multiple cards, go through them “and do a little math so you know which cards to pay off first,” he says. “Start looking at each line of credit carefully and figure out which ones need to have lower balances.”
If you have multiple credit cards or other outstanding debts that are dragging down your rating, consider applying for a debt consolidation loan. This is a loan that will get all of your outstanding debts in one place, at an interest rate that will be easier to pay.
“Debt consolidation is a great option for saving money and improving credit scores. With this, you essentially compile all of your debts into one loan or card and then make payments on that one account,” says Hardekopf. “Keeping track of the payments is easier because you only have one bill to think about, so this reduces your chances of missing a payment in the future.
“If you manage to get a loan or card with a low-interest rate, you could also save yourself a lot of money in interest payments by doing this,” he adds. “Not all people qualify for debt consolidation, so you will need to explore the options available to you.”
Most debt consolidation loans have terms between 30 to 60 months, with interest rates and fees that will vary by your situation, so work with a lender to figure out a schedule that you know you can stick to.
While it’s important to focus on paying off your debts, you still have a life and day-to-day expenses.
Jason Gaughan, a Credit Card Executive at Bank of America, says that one avenue you might consider to build up your credit while making certain you don’t do anything that might drag down your score further is to apply for a secured credit card.
“A secured card typically requires a cash deposit that serves as the credit line. The security deposit acts as a safeguard to cover any purchases in the event that you miss a payment,” Gaughan says. “Demonstrating a strong track record on a secured card can help you qualify for an unsecured credit card in the future.”
A secured card should be the only card you should consider applying for while you are repairing your credit. Not only do you need to focus on making on-time payments and paying down your balances, but applying for a credit card actually brings your score down, at least for a while. And applying for multiple credit cards in a short time is often a warning sign for credit card companies.
“Some people will try for new cards for debt consolidation or bill reduction, which is perfectly understandable. Just note that each time a company pulls your credit, you get a mark on your report,” says Hardekopf. “Rack up enough marks, and you’ll lose whatever benefits you expected to gain after the applications.
“Rather than trying to get as many credit cards as you can, stick with whatever you have now and let your history build. Once you have several months or years’ worth of on-time payments and low balances, your credit score should improve. The longer you maintain this, the better off you will be.”
While it might be tempting, if very unhelpful, to blame yourself for a low credit score, remember that you’re only human and everyone makes mistakes. And that includes credit card bureaus.
If there’s a mistake in your credit report, contact the bureaus right away. Write a letter that explains the mistake, include a copy of the report with the mistakes circled, and include any proof you might have, such as credit card bills, which you can often access online from your credit card company’s website. The bureau will have 30 days to investigate.
You can contact the bureaus here (information courtesy of Shannon Kors Vice President, Enterprise Programs Strategy and Marketing at Discover).
Send a letter to Annual Credit Report Request Service, P.O. Box 105281 Atlanta, Georgia 30348-5281.
Remember that these things take time, so try not to get too frustrated with yourself or the situation, just focus on doing the things that are in your immediate control, like staying on top of your monthly payments and paying off any outstanding balances. It’s not helpful to get mad at yourself for any mistakes you made with your finances in the past, just focus on doing better in the future. Like with losing weight, if you stay consistent and work on developing responsible habits, you will eventually see results, even if they don’t always come as quickly as you would.
“Transforming your credit score will not take place overnight. Most adjustments in your score will take at least 30 days to show up, but some could take six months or more,” says Hardekopf. “Be patient, and learn to manage your money well in the meantime. You’ll soon develop habits that are sure to increase your credit score.
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