Bad credit can make it difficult for you to get an apartment, a mortgage, or a credit card. It can also force you to pay higher interest rates, which can make the loans and credit lines you receive more expensive to repay.
If you have a fair or bad credit, defined as a FICO score of 669 or less, you may be wondering how to increase your credit score. As hopeless as the situation may seem now, bad credit doesn’t have to last forever. There are steps you can take immediately to start increasing your credit score.
Your Credit Reports Copy
Before you can figure out how to increase your credit score, you need to know what score you are assuming. Since your credit score is based on the information in your credit report, the first thing you should do is improve your credit score.
A credit report is a record of your repayment history, debts, and credit management. It may also contain information about your accounts that have gone to debt collection bureaus and any claims or bankruptcies.
Order copies of your credit reports from each of the three major credit reporting bureaus to identify the accounts that need work. You can get free copies of your credit reports from each of the major credit reporting bureaus every 12 months.
Issue in Dispute Credit Report
Under the Fair Credit Reporting Act, you have the right to accurate credit reporting. This right allows you to dispute credit reporting errors by writing to the relevant credit bureau, which must investigate the dispute within 30 days.
Errors that can be caused by creditors entering data, easily exchangeable Social Security numbers, birthdays, or addresses, or identity theft, can affect your credit score.
For example, if you already have a history of late payments, and inaccurately reported late payment in someone’s report could have a dramatic and fairly immediate negative impact on your score, as late payments account for 35% of your credit score. The sooner you dispute and errors fixed, the sooner you can start increasing your credit score.
Avoid New Credit Card Purchases
New credit card purchases increase your credit utilization rate – a ratio of your credit card balances to their respective credit limits that represent 30% of your credit score. You can calculate it by dividing your debt by your credit limit. The higher your balances, the higher your credit utilization rate, and the more your credit score may be adversely affected.
Under the FICO Score model, it is best to keep your credit utilization below 30%. To achieve this 30% goal, you pay cash for purchases instead of putting it on your credit card to minimize the impact on your credit utilization. It is even better to avoid the purchase altogether.
Pay Off Old Balances
Your payment history accounts for 35% of your credit score, making it the most important determinant of your credit. The further behind you in your payments, the more it harms your credit score.
Once you have curbed new credit card spending, use the savings to catch up with your credit card payments before they are debited. The credit card provider will block the account for future use or send it to a collection agency.
Do your best to pay off the outstanding balances in full; the lender will then update the balance to “paid in full,” which will have a more favorable effect on your credit than on an unpaid account. Also, you will continue to carry a balance if you slowly pay off an account over time.
Avoid New Credit Card Applications
As long as you are in credit repair mode, avoid applying for new credit. When you apply for new credit, the lender often conducts a “hard investigation,” a review of your credit that affects your credit report and affects your credit score.
How many credit accounts you have opened recently and how many tough requests you have made reflect both your risk as a borrower, so that they account for 10% of your credit score. Opening many accounts over a relatively short period of time can be a red flag for lenders that a borrower is in serious financial distress so that it can further reduce your score. In contrast, the fact that you have few or no recently opened accounts indicates financial stability that can boost your credit score.
Leave Accounts Open
Closing a credit card rarely improves your credit score. At least make sure before closing an account that it does not adversely affect your credit rating. You may be tempted to close credit card accounts that have become debt-free in the past, but the outstanding amount will remain on your credit report until you repay it. It is better to leave the account open and pay it off on time each month.
Although your card has zero credit, closing your credit card can still hurt, as the length of your credit history accounts for 15% of your credit history. Credit history length factors the age of your oldest and most recent account, as well as the average age of all accounts. Generally, the longer you keep accounts open, the more your credit history increases.
Contact Your Creditors
You may be the last person you want to talk to, but you would be surprised at the help you get when you call your credit card issuer. If you have difficulties, talk to your creditors about your situation.
Many of them have temporary hardship programs that reduce your monthly payments or interest rates until you get back on your feet. If you alert them to the possibility that you might miss an upcoming payment, they may even strike a mutually beneficial deal. These courtesies can allow you to make progress in repaying outstanding balances and ultimately improve your credit score.
Paying Off Debt
The amount of debt you carry as a share of your total loan is equivalent to 30% of your credit score, so you need to start repaying that debt to increase your credit.
If you have a positive cash flow, I. e. earn more than you owe, you should consider two common methods of repaying debt: the debt avalanche method and the debt snowball method. In the avalanche method, you first pay off the credit card with the highest APR with your additional money. Make minimum payments on other cards and use all remaining funds towards the high-interest card. When you pay off this card, switch to the next highest APR card and repeat.
The snowball approach requires you to make the least payments on each card, each month. You then use any additional money to pay for the card with the lowest credit balance. Once it is paid out, you apply additional money to the card with the next lowest credit balance, but continue to make minimum payments on the other cards.
However, if you owe more than you earn, you need to get creative to get 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 site for extra money. It will require some sacrifices, but the financial freedom and points you win will be worth it.
If you are overwhelmed with your credit situation or monthly expenses, living paycheck to paycheck, or on the verge of bankruptcy, consumer credit counseling agencies can help you. Certified credit counselors can help you set a budget, establish a debt management plan, and get your finances in order.
Of course, the key is to find a reputable adviser. Search for a trusted credit counseling agency in Canada. Or look for a credit counselor through the search feature of Canada. You can always easily access your credit card statement to find a phone number to call if you have difficulty making your payments.
Patience and Perseverance
Patience is not a factor used to calculate your credit score, but it is something you need to have while repairing your credit. Your credit hasn’t been damaged overnight, so don’t expect it to improve in that time. Continue to monitor your credit, keep your spending in check, and pay back your debt on time each month, and over time you will see your credit score increase.