Financial hardship can hit from a variety of angles – bankruptcy, missed or late payments, collections – causing a major drop in your credit score. Fortunately, low credit scores don’t have to stay in your way forever. With a few helpful strategies, you can rebuild credit and improve your lending potential over time.
While your credit score may be lower than you want today, the credit reporting and scoring system is designed to recognize change. It sees when someone is likely undergoing financial hardship, but it also recognizes when they are improving. If you’re reading this because you searched on “how to fix my credit,” you’re already taking steps to improve your score. Here are helpful ways to boost your credit and regain borrowing power.
Key Takeaways
- There are three credit bureaus that receive data from lenders and compile it into credit reports: Experian, Equifax and TransUnion.
- Regularly check your credit report for errors.
- Set up automatic payments to improve payment history.
- Become an authorized user on someone else’s card for a quick credit score jump.
- Payment history impacts your credit score the most.
- Credit-building tools, like secure cards and credit-builder loans, can help you improve your credit score by showing that you can borrow money and pay it back on time.
Pull Your Credit Reports To Identify Errors
There are three credit bureaus that receive data from lenders and compile it into credit reports: Experian, Equifax and TransUnion. You can access each of them through AnnualCreditReport.com, which is a federally authorized website.
Once you have access to each of your credit reports, read through them carefully and look for the following:
- False accounts
- False late payments
- Incorrect balances
- Duplicates on the same report
Unfortunately, errors on credit reports are quite common. Be diligent and read through every line. If you find errors, you can dispute them to improve your credit history by explaining the errors in writing and include supporting documents to support your case.
To dispute an error, your written request should include the following:
- Your contact information, including name, address and phone number
- Credit report confirmation number, if available
- The errors you’d like fixed (supply account numbers for any account you’re disputing)
- A clear explanation of why you’re disputing the error
- Request that the information be removed or corrected
- A copy of your credit report that contains the disputed items (highlight them)
- Copies (not originals) of documents that support your position
You can send your letter certified mail or you can submit a dispute online with each agency:
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Understand What Impacts Your Credit Score
Most people understand that missing credit card and loan payments hurts their credit score, but that’s not the whole picture. Here are other factors that will impact your credit.
Payment History (35%)
Paying your bills on time every month is the best thing you can do for your credit score. After 30 days, a late payment is reported to the credit bureaus, causing a drop in your score.
Amounts Owed (30%)
The amount of debt you have affects your credit score rather significantly. Ideally, you want a credit utilization ratio between 1% and 10%. Surprisingly, you don’t want 0%: Lenders want to see that you can responsibly borrow money and pay it back.
Length of credit history (15%)
The longer your credit history, the better your credit score. One of the ways FICO® determines your score for this category is by comparing the age of your oldest account with your youngest account.
Credit Mix (10%)
Lenders like to see that you can handle different types of debts responsibly. Account holders with a mixture of installment debts (such as mortgages, car loans and student loans) and revolving accounts, such as credit cards and a personal line of credit, tend to have higher scores than those who don’t.
New Credit (10%)
New debt raises alarms with lenders because it makes you statistically more likely to fall behind on old debts. That’s why multiple credit inquiries and new accounts can hurt your credit score.
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Rebuild Your Credit Score From The Ground Up
Whether you have no credit or need to rebuild your credit, a secured credit card can be a helpful rebuilding tool.
A secured credit card requires you to make a deposit. Your deposit is the equivalent of the card’s credit limit. Use your card a little each month, then pay off the balance. Doing so will start to improve your payment history.
Time it takes to help: 3 months to a year
Take Out A Credit-Builder Loan
Similar to a secured credit card, a credit-builder loan is specifically designed to help consumers build credit and savings at the same time.
A credit-builder loan is a tool to build credit by establishing a positive payment history. It differs from a regular loan in that the money is not released to the borrower at the time of the loan. Instead, a lender earmarks the funds – usually $300 to $1000 – and the borrower makes regular installments toward the loan each month (terms usually range from six to 24 months). Lenders report your payment history to credit bureaus and they’re recorded on your credit report. If you make regular on-time payments, it helps to strengthen your credit.
Once the loan is paid in full, the funds are released. Along with helping with payment history, a credit-builder loan also boosts your credit mix since it is an installment loan.
Keep in mind that with this type of credit builder, you may be charged interest and fees. A portion of your interest (or interest earned on savings) may be returned to you at the end of the loan term, but compare rates and fees when shopping for a lender.
Time it takes to help: 6 months to 2 years
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Become An Authorized User
Becoming an authorized user on a friend or family member’s credit card can potentially improve your credit score. When you become an authorized user on someone else’s card, you receive the history of that account even if you weren’t an authorized user at the time of the activity.
Just be careful: Becoming an authorized user can both help and hurt your credit score, so be sure whichever account you join has a positive history of both on-time payments and a low credit utilization ratio.
Time it takes to help: 30 days
Get Strategic With Your Repayments
Payment history accounts for the highest percentage of your credit score; “amounts owed” is a close second. Knowing that, you can start seeing improvements if you do the following:
Set Up Automatic Payments
Automatic payments will prevent you from missing any payments on important bills. You don’t have to set it to make large payments, of course; you can do the bare minimum.
Time it takes to help: Immediately, because it prevents negative marks on your credit report
Pay Twice A Month
With your minimum payment set up, you can make a second payment as your income permits. This can help lower your credit utilization ratio when it’s reported to the credit bureaus.
A good rule of thumb is to adopt the 15/3 strategy: Make one payment 15 days before the statement closing date, then make another three days before the statement closing date.
Time it takes to help: Immediately, provided your balance is getting lower with each payment
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Pay-For-Delete Arrangements
If you have accounts in collections, you can try for a pay-for-delete agreement. This is when you request that a collection agency remove a collection account from your credit report in return for making a payment or paying off the loan. Depending on the age of the debt and your overall credit profile, this could improve your credit score, but it’s not guaranteed.
Pay-for-delete arrangements are not universally practiced by collection agencies, and credit bureaus discourage them because deleting accounts alters the true picture of someone’s credit history. Before you move forward with a payment, be sure to get the pay-for-delete agreement in writing.
Goodwill Letters
A goodwill letter is another strategy to consider, and it’s worth trying if you’ve had a strong history with a lender and have only recently missed a payment. In a goodwill letter, you request that the lender remove a late payment from your report as a courtesy for being a good customer.
A goodwill letter is a request, not a guarantee. Lenders may consider it if you can prove a special situation – a medical emergency, a temporary loss of employment or missing a statement due to a move.
Time it takes to help: 30 – 60 days
Request A Debt Validation
If you’ve been contacted by a collection agency, you can request a debt validation. A debt validation requires the collection agency to verify the following:
- Debt total
- Confirmation they have assumed ownership of the debt
- Confirmation they have a legal right to collect
A debt validation can help you find identity theft issues, as well as false collection attempts. If errors are found, you should begin the dispute process and have negative marks removed from your credit report as soon as possible.
Time it takes to help: 30 – 60 days
Action Plan To Restore Your Credit
Payment history is the biggest factor in your credit score, so once you start to consistently pay your bills on time you should see an uptick in your credit. But remember, it’s a marathon, not a sprint. Here’s the game plan.
- Pull your credit reports and identify errors. Establish auto-pay on all bills and calculate a budget to get out of debt each month. Ask friends and family if any of them would consider adding you to a credit card as an authorized user.
- If your credit score is low, consider opening a secured card, where you make a deposit to the card issuer and that amount becomes your credit limit. Make two payments each month on other lines of credit to keep your utilization low. Do not apply for new loan products.
- If you’re back on your feet, consider requesting goodwill adjustments with longtime lenders. If applicable, request a pay-for-delete agreement from your collection agency. Continue to monitor your score and credit reports.
- Consider requesting credit limit increases. It can help improve credit utilization if you have an unsecured card.
- If on a secured credit card, consider applying for an unsecured card. Make timely payments and continue to monitor your score and credit reports.
Credit Score Milestones
These are general guidelines of what to expect at each credit score range.
300 – 579: Poor
Will have trouble qualifying for loan products
May want to consider credit-building products, such as:
- Secured credit cards
- Credit-builder loan
580 – 669: Fair
May qualify for:
- FHA loan
- Conventional mortgage (in most cases, a minimum score of 620 is required)
- Mid-grade credit cards
May want to consider continuing to use credit-building products, such as:
- Unsecured credit card
- Credit-builder loan
670 – 739: Good
May qualify for:
- Better credit cards with better rewards
- Better rates with various lending products
- Better lending terms with loan products
740 – 850: Very Good to Exceptional
May qualify for:
- Premium credit cards with excellent rewards
- Prime-to-low interest rates for various loan products
FAQ
The Bottom Line: Repairing Your Score Is Doable With The Right Steps
Having poor credit is challenging, especially if you’re looking to take out a loan or buy a home. But low credit scores don’t have to derail you forever. You can repair your credit score – sometimes faster than you think – if you take the appropriate steps and responsibly manage your debt.
Get started: Review your credit report regularly, identify and dispute errors, and employ credit-building tools, like a secured credit card or a credit-builder loan. Turn on automatic payments to ensure you pay your bills on time, and compare credit card options to find the right product to help you rebuild your credit. The more you know about your credit, the more you can do to improve it – and strengthen your financial future.
Lauren Ward
Lauren Ward is a writer with over a decade of experience covering financial topics for businesses and publications. Her work has also been featured in major publications such as U.S. News and World Report, CNN, Business Insider, The New York Post and Bankrate. Her expertise includes real estate, mortgages, small business, insurance and more.
