Poor credit can make it harder for you to get a mortgage, an apartment, or a credit card. It can also put you on the hook for higher interest rates, which can make the loans and credit lines that you do obtain more expensive to repay.
If you have fair or bad credit, defined as a FICO score of 669 or below, you may be wondering how to increase your credit score. As hopeless as the situation might seem now, poor credit doesn't have to last forever. There are steps you can take right now to begin raising your credit score.
Get a Copy of Your Credit Reports
Before you can figure out how to increase your credit score, you have to know what score you're starting from. Since your credit score is based on the information in your credit report, the first place you should go to improve your credit score is your credit report.
A credit report is a record of your repayment history, debt, and credit management. It may also contain information about your accounts that have gone to collections and any repossessions or bankruptcies.
Order copies of your credit reports from each of the three major credit bureaus to identify the accounts that need work. You can get free copies of your credit reports every 12 months from each of the major bureaus through AnnualCreditReport.com.
Dispute Credit Report Errors
Under the Fair Credit Reporting Act, you have the right to an accurate credit report. This right allows you to dispute credit report errors by writing to the relevant credit bureau, which must investigate the dispute within 30 days.
Errors, which can stem from data entry snafus by creditors, easily interchangeable Social Security numbers, birthdays, or addresses, or identity theft, can all hurt your credit score.
For example, if you already have a history of late payments, an inaccurately reported late payment on the report of someone could have a dramatic and fairly immediate negative impact on your score because late payments represent 35% of your credit score. The sooner you dispute and get errors resolved, the sooner you can start to increase your credit score.
Avoid New Credit Card Purchases
New credit card purchases will raise your credit utilization rate—a ratio of your credit card balances to their respective credit limits that makes up 30% of your credit score. You can calculate it by dividing what you owe by your credit limit. The higher your balances are, the higher your credit utilization is, and the more your credit score may be negatively affected.
Under the FICO score model, it's best to keep your credit utilization rate below 30%. That is, you should maintain a balance of no more than $3,000 on a credit card with a limit of $10,000. To meet that 30% target, pay cash for purchases instead of putting them on your credit card to minimize the impact on your credit utilization rate. Even better, avoid the purchase completely.
Pay off Past-Due Balances
Your payment history makes up 35% of your credit score, which makes it the most important determinant of your credit. The further behind you are on your payments, the more it hurts your credit score.
Once you've curbed new credit card spending, use the savings to get caught up on your credit card payments before they are charged off (the grantor closed off the account to future use) or sent to a collections agency.
Do your best to pay outstanding balances in full; the lender will then update the account status to "paid in full," which will reflect more favorably on your credit than an unpaid account. In addition, continuing to carry a balance as you slowly pay off an account over time will subject you to continued finance charges.
Avoid New Credit Card Applications
As long as you're in credit repair mode, avoid making any new applications for credit. When do apply for new credit, the lender will often perform a "hard inquiry," which is a review of your credit that shows up on your credit report and impacts your credit score.
How many credit accounts you recently opened and the number of hard inquiries you incurred both reflect your level of risk as a borrower, so they make up 10% of your credit score. Opening many accounts over a relatively short period can be a red flag to lenders that a borrower is in dire financial straits, so it can further decrease your score. In contrast, having few or no recently opened accounts indicates financial stability, which can boost your credit score.
Leave Accounts Open
It's rare that closing a credit card will improve your credit score. At the very least, before you close an account, ensure that it won't negatively affect your credit. You might be tempted to close credit card accounts that have become delinquent (past due), but the outstanding amount due will still up on your credit report until you pay it off. It's preferable to leave the account open and pay it down every on time each month.
Even if your card has a zero balance, closing it can still hurt your credit score because credit history length makes up 15% of your credit score. Credit history length factors in the age of your oldest account and most recent account as well as the average age of all accounts. In general, the longer you keep accounts open, the more your credit score will increase.
Contact Your Creditors
They might be the last people you want to talk to, but you'd be surprised at the help you might receive if you call your credit card issuer. If you're having trouble, talk to your creditors about your situation.
Many of them have temporary hardship programs that will reduce your monthly payments or interest rate until you can get back on your feet. If you alert them to the possibility that you might miss an upcoming payment, they may even be able to establish a mutually beneficial arrangement. These courtesies may allow to make progress in paying down outstanding balances and eventually raising your credit score.
Pay off Debt
Your amount of debt that you're carrying as a proportion of your overall credit represents 30% of your credit score, so you'll have to start paying down that debt to raise your credit.
If you have a positive cash flow, meaning you earn more than you owe, consider two common methods for paying down debt: the debt avalanche method and the debt snowball method. With the avalanche method, you first pay off the credit card with the highest APR with your extra money. Make minimum payments on other cards, and use any leftover funds toward the high-interest card. When you pay off that card, move to the next-highest APR card and repeat.
The snowball method requires you to make minimum payments on every card, every month. You then use any extra funds to pay down the card with the lowest balance. Once that one is paid off, apply extra money to the card with the next lowest balance, but continue to make minimum payments on the other cards.
If, however, you owe more than you make, you'll need to get creative about coming up with the extra money you need to pay off your debt. For example, you could drive for a ride-sharing service or sell some things on an online auction website for extra cash. It will take some sacrifice, but the financial freedom and the credit score points you'll gain will be worth it.
Get Professional Help
If you are overwhelmed by your credit situation or monthly expenses, you live paycheck to paycheck, or are confronting bankruptcy, consumer credit counseling agencies are available to assist you. Certified credit counselors can help you create a budget, put together a debt management plan, and get your finances in order.
Of course, the key is to find a reputable one. Locate a trustworthy credit counseling agency through the National Foundation for Credit Counseling, the longest-running non-profit organization. Or, locate a credit counselor using the search feature of the U.S. Trustee Program offered through the U.S. Department of Justice. You can always simply refer to your credit card billing statement for a phone number to call if you're experiencing trouble making your payments.
Be Patient and Persistent
Patience isn't a factor that's used to calculate your credit score, but it's something you need to have while you're repairing your credit. Your credit wasn't damaged overnight, so don't expect it to improve in that amount of time. Continue monitoring your credit, keeping your spending in check, and paying your debts on time each month, and over time you will see a boost in your credit score.