Credit scores range from about 300 to 850; the higher your score the better. Having a low score can keep you from getting a loan, and can cost you more in interest for loans you are approved for, all because you’re seen as a higher-than-average risk.
The best way to repair bad credit is really about establishing new credit habits and policies; you can’t really repair existing credit – you can only improve going forward which eventually will outweigh bad habits you may have demonstrated in the past and help boost your score. But it takes time.
The three most basic tips we can provide to help you start creating positive credit history are:
- Stop using credit
- Pay down your debt
- Start paying bills on time
Let’s look at each in a little more depth:
Stop Using Credit
If you want to improve your credit rating, stop using credit cards today – cold turkey – to ensure that your situation does not become more severe.
While not using credit cards can present challenges and force compromises, we recommend people use it as a payment option of last resort. The most practical way to purchase goods and services (not all, but certainly most) is to buy only what you can afford today, with money on hand.
That doesn’t mean you must get rid of and never use credit cards again. Having credit cards and making payments on time (and, preferably, at more than the minimum amount) will help rebuild your credit score. Credit agencies see a person with cards paying on time as a better risk than someone with no credit cards at all.
Once you’ve paid all or most of your balances, you may be tempted to begin opening additional accounts. It’s wisest to not open more accounts too quickly, as that will lower the overall average age of your accounts, which could negatively affect your score, especially if you don’t have a great deal of other credit information available. Opening only new accounts you believe are beneficial (have a lower interest rate, for instance, or pay you in terms of percentages back or other perks) and paying them off on time will raise your credit score in the long term.
Pay Down Your Debt
The most effective way to improve your credit score is by paying down your credit card debt. To start that process, make a list of all of your accounts and the amounts owed on each; note the interest rate for each, too. Develop a plan to pay off the debt by first paying towards the credit card charging the highest interest rate; while you’re focusing the majority of your cash on that card, pay only the minimum payment on the other cards. Once that first card is paid in full, target the card with the next highest rate and so on.
Some credit consultants recommend paying off the smallest balance first (whether or not it has the highest interest rate) simply to give you a sense of accomplishment as you start the process. If the balance is small enough and you tackle the card with the highest interest rate immediately after, this may be beneficial to you.
Pay Your Bills On Time
Credit scoring agencies like to see that you’re consistently paying bills on time (and certainly not missing any payments). Your payment history makes up more than a third of your credit score, making it one of the biggest contributing factors to your score.
Enroll in automatic payment with your credit card providers so that payments to them are automatically taken from your bank account – that way, they’ll never be late! Remember, though, that automatic payments to credit cards are limited to the minimum payment. Ideally, you should pay more than the minimum to get the debt paid off sooner and reduce interest payments.
Credit scores take into account both credit problems and positive data that demonstrates you’re managing your money well. The impact of past credit problems on your score diminishes as time passes and as recent good payment patterns show up on the report. Start paying bills on time and your score will begin to improve.
Once you pay off your credit cards and your score reflects your efforts, make sure not to drop back into old habits. Limit the number of credit cards you keep, use only when necessary, and keep your balances low.
If you haven’t already, request a free copy of your credit report and check it for errors. Your credit report contains the data used to calculate your score and while not common, there can be errors in reporting. Make sure that none of your accounts list late payments that were not late, and that the amounts you owe on each account are accurate. Report any discrepancies immediately to the credit bureau and reporting agency.
It’s impossible to rebuild your credit score immediately, but if you take these steps to manage your credit and pay on time, your score should increase over time. This biggest benefit of improving your credit rating is that in the process, you’ve reduced your debt and the high interest you’re paying, freeing up money that you can use to make purchases without having to use credit!