When almost one-third of Americans have low credit scores, you know you’re not alone in your struggle to fix your poor credit. People with bad credit, many of whom had excellent credit scores at one time, just ran into some bad luck. Perhaps, they’ve had a serious illness or a job loss.
Whatever the reason, all it takes is one or two late payments to wreak havoc on your credit score. What took years to build up, can be destroyed within the space of two credit card billing cycles.
You Can Do Something About Poor Credit
There are things you can do that will impact your credit score right away. In the credit world, “right away” means within a few months, after the credit-scoring agencies start recording your improved payment and credit-management habits.
Other credit activity will take longer to affect your credit score but will definitely help to rebuild it. Implementing a short-term and a long-term strategy will help you fix your poor credit score and reduce your debt. There are three things you should do immediately.
First, Check Your Credit History
There are three main credit reporting agencies that record your information and generate credit scores for businesses that need access to the information. The three companies are Experian, Equifax and TransUnion.
Each company uses its own scoring methodology so you may notice that your credit score can vary somewhat among the three credit reporting bureaus. Generally, banks and lenders that report your payment and credit histories will report to all three credit bureaus, not only one or two.
When you review your credit reports from each credit bureau, take a careful look at the following information on each report to make sure that it is accurate and complete:
- Review your biographic information like your name, date of birth or Social Security number. One mistake in this category can land someone else’s bad behavior on your credit report. You can also see any mistakes in your address history or perhaps if someone else applied for credit using your personal information.
- Watch out for fraudulent financial and legal issues like a bankruptcy, lien, court judgment or garnishments. These reported items stay on your credit report for seven-to-ten years. If you fail to pay a lien or a judgement, it will continue to negatively affect your credit rating. Sometimes, people don’t even know that they have a judgement against them. You should investigate anything that looks suspicious and make sure to pay outstanding liens and judgments right away if they turn out to be legitimate.
- Confirm that the list of your creditors is accurate. This is the heart of your credit report. It details the account status, your credit limits, and your payment history for every creditor you have and have had for several years back. You’ll want to check that the report correctly lists the amount of the payments you’ve made toward your balance and whether you’ve made your payments on time. Note any inaccuracies, even small ones. You’ll need to address every mistake on your credit report.
Second, Deal With The Worst Problems First
The three credit bureaus put a lot of weight on your payment history and what percent of your available credit you are using. Most people understand that making late payments is bad for your credit score. But they aren’t aware that using more than 30 percent of your available credit drags your score down as well.
The most important things to do are to reduce your balances and make payments on time for more than the minimum balances. Follow these simple rules:
- For each credit card that you have open, do your best to reduce the balance below 30 percent of the credit you have available (your credit limit)
- Pay more than the minimum balance each month
- Pay your bills on time
- Correct any errors in your credit history right away
Third, Rebuild Your Credit Score
It can take a long time to get rid of certain negative information on your credit report. However, by paying bills on time and not using your cards, you can start to reverse the negative trend fairly quickly.
- The credit card companies report on-time payments, payments-in-full or payments for more than the minimum on a monthly basis. After a few billing cycles showing positive payments, you will notice slight increases in your credit score.
- As other negative events keep moving further into your past credit history, the part of your score that is influenced by these events will have less weight each time your score is calculated. For example, if you have an account that was in collection, and you paid it, the negative event—the collection—becomes less influential to your credit score as time goes on. Dealing with any current collection efforts will put them to rest sooner and move them into the past, where they belong.
A Focused Effort Can Fix Poor Credit
The credit rating agencies look at each kind of debt differently and assign importance to it based on which category it falls into. By understanding which type of negative-debt you have, you can fix your credit score in the most efficient way possible.
Work on paying down your balances. Set up reminders to yourself so that you never miss a payment on your account. Make extra principal payments with every bit of extra cash you receive at every opportunity. Pay down the cards with the highest interest rates or largest balances first.
Finally, stop using your credit cards. Take them out of your wallet and put them out-of-sight. This will help you to not increase your card balances and get into the habit of using cash for almost-every purchase until you get things back under control.
You can start to fix your poor credit within only a few months by being diligent and disciplined in your spending and payment habits. But, only you can do it.