Poor Credit Score? Here's How to Turn it Around Fast
August 28, 2023
6 min read
Your credit score isn't just a random number—it's a dynamic tool that can significantly impact your financial life. Whether you're looking to buy a home, finance a car, or even secure a credit card with favorable terms, having a good credit score can make all the difference.
This guide will explain everything you need to know about credit scores. We'll look at how they work, why they're so important, and most of all, how to boost yours. This will help you get better deals on loans. Let's get started on understanding credit scores so you can take control of your finances!
Why Do Credit Scores Matter?
Ever wondered why that credit score number is a big deal? Think of it as a guide for lenders. When you want to borrow money, they use this number to guess how risky you are.
A higher number tells them you're less risky—like a green light for good loan deals with lower interest rates and more money to borrow. But a lower number might mean tougher terms or even a loan rejection.
Understand How Credit Scores Are Calculated
The first step is understanding what goes into calculating your three-digit credit score. Your score is determined by the information in your credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion. While the exact formula used by each bureau varies, five main factors impact your score:
- Payment history (35% of score). Whether you pay your bills on time or have late payments, collections, and bankruptcies.
- Credit utilization (30%). The ratio between your total balances and total available credit limits. Using more than 30% hurts your score.
- Length of credit history (15%). How long you've had credit accounts, with a longer history being better?
- New credit (10%). Applying for too many new credit accounts in a short time frame can hurt your credit score.
- Credit mix (10%). Holding different types of credit like credit cards, installment loans, and a mortgage.
Review your credit reports closely and look for inaccuracies or wrong information that could be damaging your scores. If you find any, dispute those items by filing a complaint—this can help improve your scores.
8 Quick Tricks to Improve Your Score
Now that we've established the importance of credit scores let's delve into actionable strategies that can help you boost your creditworthiness and secure those sought-after loan terms.
1. Pay All Bills On Time
The most important part of your credit score is your history of making payments on time. Any lateness, collections accounts, or other negatives can really drag your score down. The key is to start building a perfect on-time payment record going forward. This will help raise your score.
Set up autopay through your credit card and loan providers to have monthly payments automatically debited from your bank account. Use calendar reminders as well. For any accounts not on autopay, schedule payment dates right when you get your paycheck or income to ensure sufficient funds.
2. Keep Credit Card Balances Low
The second most important aspect influencing your credit score is credit utilization, indicating the proportion of your total available credit that you're consuming. Fully exhausting your credit cards can significantly hurt your score. As a general guideline, aim to keep your balances at 30% or below your overall credit limit for each card.
Pay off any balances you can each month. Consider making more than the minimum payment to pay down balances faster. You can also request credit limit increases with your card issuer periodically to boost your total available credit and therefore lower your utilization.
3. Avoid Closing Old Credit Accounts
While closing unused credit cards may seem financially wise, it can actually hurt your credit score. That's because closing a card shortens your length of credit history and raises your utilization.
Keep old credit accounts open, even if you don't use them often. Consider charging a small purchase periodically to keep the card active. If an account does get closed, opening a new credit card will help recoup some of the lost credit history length.
4. Limit New Credit Card Applications
Opening many new credit accounts within a short period sends a red flag to lenders that you are a risky borrower, and this can damage your credit score. Every credit card application also leads to a hard inquiry on your credit report, which causes a small drop in your score.
Be selective about only applying for credit when you need it. In general, limit applications to one new card every six months. The inquiry will still appear on your report even if you're denied. Each inquiry stays on your credit report for two years.
5. Fix Any Credit Report Errors
Comb through your credit reports from Equifax, Experian, and TransUnion at least once a year to check for any incorrect or outdated information that could be dragging down your score. Common errors include:
- Accounts that don't belong to you
- Late payments that were actually on time
- Outstanding balances already paid
- Closed accounts are still listed as open
Disputing errors with the credit bureaus is free and easy to do online or by mail. To support your case, submit copies of any evidence, like bank statements or receipts. Under federal law, bureaus must investigate within 30 days. You can also ask the creditor who reported incorrect information to fix the errors by submitting a consumer dispute.
6. Leverage Secured Credit Cards
If your credit is poor, you may need to start off with a secured credit card before qualifying for a regular unsecured card. With secured cards, you put down some cash, usually the same as your credit limit. This deposit proves to the lender that you can handle payments, making things less risky for them. Secured cards are a way to build up a record of paying on time and to show how long you've been using credit.
After a year of responsible use, you can qualify for an unsecured card and graduate to a higher credit limit. Just be sure to request your security deposit back from the secured card issuer. Avoid prepaid debit cards that don't report to the credit bureaus.
7. Supplement with Credit-Builder Loans
Essentially, credit-builder loans let you borrow money to boost your credit score. Instead of receiving the loan amount in cash, it's deposited into a savings account. You're then required to make consistent monthly payments over a predetermined period, typically a year.
The on-time payments are reported to the credit bureaus. Once you pay the loan in full, the bank releases the money you've paid, plus any interest earned, to your savings account. Credit unions and local banks sometimes have programs for credit-building loans.
8. Monitor Your Credit Regularly
Stay on top of your credit by checking your scores and reports regularly at least every three to six months. Many credit card companies now offer free monthly access to your FICO score on their websites or apps. You can use AnnualCreditReport.com to obtain your free annual credit reports from each bureau and dispute any errors.
Consider signing up for credit monitoring that alerts you whenever key changes are detected that can impact your credit, such as new accounts opened in your name. Monitoring services provide access to your full credit reports and scores.
Wave Goodbye to Bad Credit
Think of your credit score as a mirror that shows how well you manage your money. Whether you're working towards buying a home, securing a loan for your dream car, or simply improving your credit card terms, a strong credit score is like your personal key to unlocking fantastic financial opportunities.
Once you wrap your head around what shapes your credit score and follow the steps in this guide, you're like the captain of your financial ship. Begin your quest for a stronger credit score today—your future money goals will definitely give you a nod of approval.
