A good credit score is vital for many financial decisions, but you’re not alone if you’re struggling with bad credit. With approximately 16% of Americans struggling with bad credit, there’s no shortage of people looking to get their credit in good shape.
While bad credit might feel impossible to escape, this is far from the truth. With the right steps, you can learn how to rebuild credit score levels and transform your credit. Changing your credit starts with knowing how to fix bad credit – and this article, from our team at iTHINK Financial, will help you achieve that goal by exploring seven critical steps to fixing your credit score. Let’s get started.
Step One: Keep Track of Your Credit Report
While it might sound simple, fixing bad credit often starts with checking your credit score and analyzing your report. Checking your credit report lets you identify inaccuracies, often the silent cause of poor credit.
Though inaccuracies are rare, they can take a significant toll on your credit score if not addressed promptly. Review your credit report from the three central credit bureaus, Experian, TransUnion, and Equifax, at least once annually to help you identify problems or incorrect charges affecting your score.
The first thing to check for when assessing your credit report is your account information and history. This step can help you identify accounts you don’t recognize or payments that have been inaccurately reported. Additionally, look into your past credit inquiries, as a hard inquiry you don’t recognize might indicate credit fraud.
Considering that 65% of cardholders have been previous fraud victims within their lifetime – about 151 million Americans – identifying instances of fraud on your credit report is critical to protecting your finances.
Step Two: Don’t Miss Your Payments
Missed payments are one of the leading causes of bad credit, and avoiding a missed payment is one of the most important steps in knowing how to rebuild credit score levels. Payment history accounts for a massive 35% of your overall credit score, so it’s no surprise that it plays a massive role in how good – or bad – your credit score is.
Your score is bound to increase if you have a history of on-time payments. Always ensure you don’t miss your credit payments by more than 29 days, as payments that are 30 days late or more can be reported to the big three credit bureaus. Always fulfill your monthly payments and pay all of your bills on time.
A simple way to avoid missed payments is to take advantage of automatic payment features, which can ensure you never miss a payment again, helping you increase your credit score.
If you have bills that don’t allow for automatic payments, such as certain medical bills, pay them as soon as you receive them, if possible. If it’s not feasible to pay the entire amount at once, work with your healthcare provider to develop a payment plan that won’t exceed your payment budget but will still help you maintain a healthy credit score.
Step Three: Pay Down Your Debt
Many Americans face significant credit card debt, and escaping this debt can feel overwhelming and impossible. However, paying down your debt is one of the most important steps in fixing your bad credit, and devising a payment plan to make this step possible is integral to success during this endeavor.
49% of credit card holders carry debt month to month on at least one of their credit cards, and if you’re reading this article, you’re likely one of them. Lowering the amount of revolving debt you carry will influence the “amounts owed” section of your FICO Score by impacting your utilization ratio. This ratio details the amount of available credit you’re using – for instance, if you’re spending $300 on an account with a $1,000 limit, you’d have a 30% utilization ratio.
As you approach repaying your debt, there are two methods to consider: the snowball method and the debt avalanche method. The snowball method lets you focus on repaying small balances before saving enough to address significant outstanding debt. The debt avalanche method is used if you want to repay your high-interest cards before paying off smaller amounts. Choose a method that works best for you based on your financial situation.
Step Four: Limit the Number of New Accounts You Apply For
Opening credit accounts is necessary to start building a credit file, but be cautious about the number of new accounts you apply for when working on your bad credit. Credit card applications lead to hard inquiries, which take a small toll on your credit score. While one hard inquiry won’t destroy your score forever, several inquiries can build into significant damage and have a negative compounding effect.
Opening too many new accounts also decreases the average age of your credit accounts, which similarly impacts your credit score. Though these damages might seem minor, they can cause several issues down the road if you aren’t careful. The bottom line? Approach the application process cautiously, and don’t open new accounts unless necessary.
Step Five: Keep Your Utilization Ratio Below 30%
Pay attention to your utilization ratio when making any purchase decisions. Remember that this ratio describes how much credit you’re using compared to your credit card limit. A utilization ratio that exceeds 30% is a recipe for disaster, as credit leaders will use your utilization ratio to assess how capable you are of handling your finances.
Technically, the best credit utilization ratio is 0%, which indicates that you pay your monthly balances off promptly and don’t have any revolving debt. However, ratios under 30% are generally considered healthy, meaning you’ll have a better credit score and remain in good standing with credit bureaus.
For example, if you have a credit card limit of $4,000, you should avoid spending more than $1,200 on your credit card. A card with a limit of $2,000 shouldn’t exceed $600 monthly – so be aware of your credit limit and keep an eye on how much you spend in a typical month.
Step Six: Dispute Credit Errors
As we’ve established, credit card fraud is a serious problem that can harm your credit score. To avoid the pitfalls of bad credit, it’s important to note and dispute credit card errors as soon as they occur.
Beyond fraudulent charges, it’s important to recognize that, sometimes, credit bureaus make mistakes. If you notice mistakes on your credit report, report them to your credit bureau immediately to avoid damaging your credit score. Whether these mistakes involve accounts that don’t belong to you or an inaccurate payment history, reporting issues is vital to protecting your credit.
Some mistakes you’ll commonly find on credit reports include the following:
● Accounts belonging to someone with the same name as you or a similar name
● Incorrect identity details, such as your name or address
● Accounts you’ve closed that are still being reported as open
● Fraudulent accounts linked to your credit that result from identity theft – an issue that impacts an estimated 9% of U.S. residents
● Repeated charges or debt that should only have been recorded once
Step Seven: Keep Your Old Cards Open
Once you’ve paid off the balances of your old accounts, you might be tempted to close them and put that chapter of your life behind you. However, keeping your old credit cards open is essential in rebuilding your credit and escaping the challenges of bad credit.
Keeping your credit cards open allows you to establish a long credit history, which accounts for 15% of your FICO score. While keeping your credit cards open is a surefire way to improve bad credit, keep in mind that some card issuers will close your account after a specific period of inactivity. So, only keep your cards open if you plan on using them in your financial decisions.
The Benefits of Fixing Bad Credit
Knowing how to fix bad credit is essential to improve your financial situation and maintain a healthy financial life. However, you might be curious about the benefits of fixing bad credit and what this process means for your financial future.
Some of the many advantages of fixing bad credit include:
● Bad credit scores mean higher interest rates, so fixing your credit will help you save significantly on interest rates.
● Your credit impacts your insurance premiums, so boosting your credit score will also help you get a lower insurance rate.
● The better your credit score, the higher your credit limit – making improving a bad score vital if you’re looking for more credit allowance.
● Bad credit can prevent you from making purchases like a home or renting an apartment, meaning addressing your bad credit score and making noticeable improvements is essential.
● Some employers will check your credit before hiring you, meaning a bad credit score can impact your employment prospects.
Live a Better Financial Life With iTHINK Financial
Fixing bad credit is vital to ensuring financial stability and prosperity in your future. iTHINK Financial offers the resources you need to improve your credit score and start creating a financial future that you’re confident in. We provide personal and business banking services, helping you navigate your finances from loans to credit cards, mortgages, and more. No matter what you need financially, we’ve got you covered when you become an iTHINK Financial member.