Building a good credit rating is like losing weight – it takes time and poor choices to get into bad shape, and it takes time and wise choices to get back out. There’s no quick fix for poor credit scores, however, if you start making wise financial decisions and using credit responsibly, you’ll see a gradual, steady improvement in your score over time.
This post shares a few simple strategies that can help you get your credit score back on track.
- Regularly Check your Credit Report
Your credit score is largely based on the information contained in your credit report. Your credit report is basically a summary of your borrowing behavior, which is typically put together by one of the three major credit bureaus: Equifax, Experian, and Transunion. This means you have three credit reports, one from each of these bureaus.
The credit bureaus mainly rely on lenders to report information to them. However, lenders aren’t perfect; they sometimes make mistakes, such as reporting that you still owe money on a loan that you paid of many years ago. Such errors can have a drastic effect on your credit score.
For this reason, it’s always wise to check your credit reports regularly. In fact, one of the fastest ways to give your credit score a boost is fixing errors that hurt you. Here’s how you do it:
- Order your report online: The U.S. law entitles you to get a free credit report annually from each of the bureaus. You can get these from AnnualCreditReport.com. The good thing is that you don’t have to get all three of them at once. Rather, you can spread them out throughout the year, and get one from each bureau every four months. This way, you can stay updated about your credit and discover any mistakes promptly.
- Check for mistakes: once you download your credit report, go through it thoroughly. Ensure that all the accounts listed on the report are yours, and that each one has the correct amount of what you owe. Be sure to also check for the payments listed as unpaid or late, and confirm if it’s true. Finally, go through any listed negative items such as late payments that are over 7 years old. In most of the cases, negative items like this should be removed from your report after 7 to 10 years
- Dispute any errors: if there are any mistakes on the report, contact the bureau and iron them out. All the bureaus have forms available on their respective websites that you can use to file for a dispute. Alternatively, send them a letter giving details about yourself and the error in question, with a formal request to correct it. You can use a sample letter available from the Federal Trade Commission as a template. Attach a copy of your credit report and any other documents that might help support your claim.
- Wait for a response: The bureau should get back to you within 30 days with results of your dispute. If they find there was an error, they will correct it and send you a free copy of your updated report. They will then share the information to the respective lender with the mistake, as well as the rest of the bureaus.
Another great way to stay on top of your credit is checking your credit score for free. There are services such as Credit Karma that helps you access both your score and the information behind it. With it, you can monitor your credit report throughout the year and catch any errors promptly.
- Pay All your Bills on Time
One of the biggest factors in your credit score is your on-time payments. Whenever you’re a few days late to pay your bills, it can make a significant dent in your credit score. Plus, the later you are with your payment, the more your score will be hurt.
Unfortunately, if you’ve been making late payments in the past, you can’t really wipe that mistake. Your best bet is outweighing it by staying on top of your payments and paying in time, month after month. With credit ratings, your recent behavior counts more, meaning your old mistakes can gradually fade into the background. The more you pay your bills on time, the more your overall score will increase.
In case you’re having trouble remembering to pay your bills on time, consider setting up payment reminders. Many banks have this service feature as part of their online banking. When your bill is due, your bank sends you a text message of email to remind you to make the payment.
Alternatively, consider setting up automatic bill payment plan that pays off your bills as soon as they become due, with no need for action on your part. The main drawback here is that the plans typically don’t offer a chance to check your bills for possible mistakes before making the payment. Plus, they only make the minimum payment on your credit card bill, and this doesn’t really help in paying down your balance.
- Pay Down Any Debt
Aside from paying on time, another major factor when calculating your credit score is how much credit you use. The amount or percent of the available credit you actively use is referred to as utilization rate. For instance, if the credit limit of your credit card is $3,000, and the card has a balance of $1,500, your utilization rate is 50%.
According to the credit bureaus, it’s best to keep this rate below 30%. So, in the case of our example, you should aim to keep the balance on the card down to $900 or less. You can do this by paying off $600 of the $1,500 balance. Overall, the more of it you pay off, the more your score will improve.
Keep in mind that the credit score isn’t based on your credit use only. It also accounts for all the different accounts that you owe money on. So, if you keep several cards at the same time, a great way to quickly boost your score is paying them off completely.
After dealing with the small balances, shift your attention to the big ones. Have a plan in place to pay off all your credit card debt by setting aside some funds (ideally a fixed amount) to put towards paying it off each month, and tightening your belt as much as possible. If making a fixed payment towards the debt is a stretch for you, consider debt snowflaking. Whenever you manage to save a small amount, even $10 off your grocery shopping, put it towards the debt payment for the month.
For those with an unmanageable large balance, consider negotiating with your creditors. Some lenders are willing to settle for considerably less than you owe them than risk losing the full sum in case you go bankrupt. This approach can be quite effective with old debts that have gone into the collections stage. Just ensure that you make the agreement in writing.
In case the creditors are reluctant to pardon you of your debt, consider getting a personal loan from services like SoFi, which can help you consolidate your debt at much lower interest rates.
- Sign up for Experian Boost
Experian recently outed a new feature called Experian Boost, which is designed to help boost credit scores by providing you with credit for utility and cell phone payments. When you sign up for the service, you will connect the bank account you use to make the payments. Then, you will be allowed to choose and verify the different payments you’ve made, which will highlight your payment history. Since your payment history is a critical element when determining your score, Experian Boost can quickly improve your score.
- Keep a Low Balance
When you manage to keep your balance down to 30% of your available credit or lower, try to keep it there, also there are alternatives to payday loans, investigate payday credit. Here are a number of ways to do that:
- Pay in full: Once you get your bill, pay it completely. This will get your balance to zero, meaning you can start over with a clean slate. Otherwise, you will just pile up new debts on the old ones and the balances will eventually creep up. Further, interest payments will be piled on top of what you already owe.
- Charge Less: Avoid running up your credit card bill to pay for things that aren’t essential. This is not to say that you should quit using credit cards, no. In fact, taking credit cards and paying them off on time is good for your credit rating. The key here is sticking to a budget and not pushing your cards over the 30% rating.
- Pay twice a month: Keep in mind that even if you choose to pay your credit card off in full every month, your credit report balance won’t be $0. This is because most lenders usually report your balance to the credit bureaus while sending your bill; not when you pay it. For example, if you charge $1,000 on a card with a $1,000 limit, it might look like your card is maxed out, even if you just paid it off. Fortunately, you can get around this by breaking your $1,000 payments into two separate $500 payments made two weeks apart. This way, your bill won’t go beyond $500.
- Increase your credit limits: You can do this in two ways: lower your total credit balance or make the available credit limit higher. For instance, in our above example, taking the $1,000 card and raising its limit to $3,000 will instantly mean you’re using 33% of your credit. However, this only works if you keep your new, higher credit limit untouched. If you charge an extra $2,000 after raising your limit $3,000, you’re no better than before.