Fixing Your Bad Credit and Raising Your Credit Score

If you have had credit issues in the past, you might find it difficult figuring out how to fix your credit. In most cases, you need credit in order to improve your credit score. However, with bad credit, you might find yourself in a challenging cycle of being unable to qualify for the exact thing you need to raise your credit score. This type of situation can feel hopeless, but you do have options. If you’re trying to figure out the best way to improve your credit rating, here are a few things you should know.

Why You Need Good Credit?

Before you begin, it’s important to understand why you need good credit in the first place. A bad credit score is typically somewhere around 600 and lower, but can also be as high as 649, which is often considered “poor.” Fair or average credit is usually 650 to 699, so you want to get your score at least in the “good” range, which begins at 700.

Most people think having bad credit just means you just can’t get approved for a credit card. However, over the years, it can end up costing you a lot more than just a credit card. Some of the reasons you should consider improving your financial health include job opportunities and lower interest rates. For instance, there are some employment opportunities that you could miss simply because you have bad credit. In positions that require money management, it could be an indication to others that you aren’t able to properly manage funds.

When it comes to interest rates, bad credit can cost you thousands of dollars per year in interest payments.

Although you may still qualify for credit cards and other types of loans, they could cost you significantly more than it would with a better credit score. And, if you plan to buy a home in the future, it can keep you from moving into the house of your dreams. Just for these reasons alone, you should consider taking steps to fixing your credit and raising your credit score.

Calculating Your Credit Score

In order to understand how to fix your credit, it could help to have an idea of how credit scores are calculated. There are a few different types of credit scores to look for, but the FICO score is the one that is most commonly used by lenders. Although other credit scoring agencies calculate scores differently, FICO scores are calculated based on the following elements:

1. Payment history – the largest part of your credit score is based on your payment history and the number of times you have made late payments.
2. How much you owe – the amounts you owe according to the credit you have available.
3. Credit history – the length of your credit history accounts for 15% of your score. This means that older accounts are worth more than new accounts.
4. Credit mix – you need a mix of different accounts including credit cards, retail, installment loans, and mortgages.
5. New credit – a high number of new accounts or inquiries can indicate that you are high-risk. The amount of new credit you have can account for as much as 10% of your score.

How to Fix Your Credit

IIt seems like it’s much easier to ruin your credit than it is to fix it. Also, repairing mistakes made in the past won’t happen overnight. In fact, it may take months or even years to get to a decent credit score. However, once you get there, you have the tools to properly maintain your finances so you can avoid making the same mistakes again. If you have made some mistakes that resulted in a low credit score, the following tips can help.

Pay off debt. The amount of your available credit compared to your balances can affect your credit score a great deal. It is recommended that you keep your balances to 30% of your available credit limit, or you risk damaging your credit rating. If you are able to, sometimes it helps to ask for a credit limit increase as long as you don’t continue to use your card.

Pay missed payments. If you have late payments or missed payments on any of your accounts, it’s best to catch those up and get them current if you want to increase your credit rating. Contact your creditors and set up payment arrangements.

Check your credit report. Many consumers find at least one error on their credit reports, which can affect your score negatively for years. At the very least, you should check your credit reports for errors once per year. You can dispute any errors you find right from your computer at home.

Check your credit score. Your credit may not be as bad as you think. If you are wondering how to fix bad credit, it’s a good idea to check your credit score to find out where exactly you are. Many credit cards offer free credit scores or you can usually get an idea of your score when you apply for a loan or credit card.

Make payment arrangements. Whether you have accounts in collections or you just owe a handful of creditors, although it seems easier to ignore them, this isn’t the best way to deal with them. Even if you are only able to make small payments, your credit score will be in a much better place than if you ignore your debts and hope they go away.

How to Raise Credit Score

Once you have figured out your score and you’ve taken some steps to fix your credit, you can work on raising your credit score and improving your financial situation. Some of the steps you should take to improve your score include the following:

• Mix up your credit file and include credit cards, loans, and mortgages.
• Make your payments on time every month.
• Keep down the number of credit inquiries.
• Keep balances below 30% of available credit limit.
• Don’t close old accounts.

In addition to these steps, it could be helpful to get a secured credit card so you can establish a positive payment history. As long as you make your payments on time and pay your balances in full each month, a secured credit card can become an important tool in fixing your credit.

In order to raise your credit score, you will need to set up a plan and stick to it. You won’t get better credit instantly, but over time your rating will get better and you’ll be on your way to a positive financial future.

Image from getlenny.com

Christina Majaski More than 10 years experience covering credit cards and personal finance

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