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Repair your Credit Score with These 4 Steps

Reading time: 5 Minutes

June 11th, 2020

You find a car you love, and apply for a loan to buy it, but don't qualify. Or maybe you're looking for an apartment rental, and keep getting passed over by property management companies. In both scenarios, the thing holding you back could be a low credit score.

Having a good credit rating tells potential landlords and lenders you are dependable and, when it comes to credit cards and major purchases, may get you significantly better interest rates, saving you thousands of dollars or more.

As you probably know, there are many things that can pull your credit score down, including sudden life setbacks, like the loss of a job or an unexpected medical crisis, or even just bad decisions or honest mistakes. It happens to the best of us. Fortunately, a low credit score can be fixed, but it will take time and consistent effort, and it really helps to understand how your credit score is calculated.

These four steps will help you begin to repair poor credit:

1. Download your Credit Report

The first thing you'll want to do is get a copy of your credit report, so you can see your current credit score and the specific elements that went into calculating it.

Three credit bureaus, ExperianTransUnion and Equifax, collect data on your spending and repayment habits. They share that information with FICO, a company that uses a mathematical algorithm to turn the data into a score.

Several factors go into formulating your score, with the two most critical being whether bills are paid on time, and the percentage of available credit being used. Together, these factors account for 65 percent of your score. FICO scores range from a low of 300 to a high of 850, with scores under 670 considered poor. A third of American consumers fall into this category

(Millennials have the lowest credit scores, on average, of any current generation, both nationally and in Hawaii, with an average score of 686. Student loans are the main culprit for a struggling score for these 30-year-olds.)

You can get a copy of your report at each of the bureaus' individual websites. The bureaus are required to share your report with you for free once a year, but, due to COVID-19, they are now offering free reports weekly through April 2021.

2. Check for Errors

Creditors and lenders may report to only a single bureau, or all three, so each report may be slightly different. Ensure that all three reports contain correct information.

A study listed on myFICO.com found that a quarter of consumers have found at least one mistake on their report that would contribute to a negative score.

Begin by checking the name and address on your report. If your name is a common one, or you have used different versions of your name for your various accounts (such as Jr., or your married name), be sure any negative information represents your actual spending activity. You don't want someone else's bad credit counting against you.

Be sure the files contain all your accounts, especially if they are in good standing and have existed for a long time, as these two considerations count in your favor. Not all utility, cell phone and other businesses necessarily share information with the bureaus, but you can contact them and request they share it.

Other possible errors include clerical mistakes where information was not input correctly, either by the creditor or the data company. Discrepancies may include getting the information wrong, like incorrect late payment entries, inputting information into the wrong person's file or entering it twice.

Document errors, and send a copy of each to the relevant companies that shared your information with the credit bureaus, as well as with each bureau. By law, they are obligated to correct the information. The Federal Trade Commission offers a sample letter that can be included in your dispute. Corrections may take time to appear on your report, as bureaus have 30 days to investigate.

3. Be on Time, and Lower your Utilization

Make it a priority to pay your bills on time every month, whether they're from installment accounts like mortgages and loans, or revolving ones, meaning credit. Tend to rent, utilities and cell phone bills in a timely manner as well. Missed payments remain on your credit history for seven years.

Work to lower your utilization of available credit, meaning how close you are to maxing out the spending limits on your credit cards. Carrying a high balance from month to month could tell a potential creditor or lender that you are having money struggles.

Ideally, you want to keep your balances at 30 percent or less of your credit limit. For instance, if you have a purchase of $200, putting it on your card with a limit of $2,000 takes up 10 percent of your limit, while choosing a card with a $4,000 limit would be a utilization of 5 percent.

Consider asking creditors to increase your credit limit on a card with which you are in good standing to improve your utilization ratio. Just make sure you don't also increase your spending.

4. Pay down Debt as much as Possible

Check your monthly expenditures like rent and car payments against your net income. Make a long-term plan to tighten your budget and put the savings toward paying off your accounts. You don't have to make cuts all at once—every little bit helps.

You may have heard of different ways of discouraging yourself from using credit, including freezing your cards in a bowl of ice, or cutting them up entirely. These hacks can be effective, but don't cancel paid-off credit cards entirely. Age of credit is one factor that determines your credit score, so closing a longstanding credit account can actually hurt your score (and also increase your credit utilization).

Apply for new credit accounts with caution, because a creditor will check your credit report, and too many of these inquiries may negatively reflect on your overall score. If you do open a new account, look for cards with as high a limit as you can qualify for and no annual fee.

Consider consolidating your credit card debt, which means paying off credit card balances with a single personal loan. If your credit is healthy enough to acquire one, a debt consolidation loan will often have a much lower interest rate, and can help you manage your finances more easily, since you'll only have a single payment each month.

Rebuilding your credit is a long-term process, but with attention to due dates, sticking to your budget, and refraining from taking on new debt, your score will improve.

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