It can be quite distressing to get a bad credit score. Not only does it lessens your chances of getting a loan approved, but it also increases the interest rate on it. In fact, most reputed lenders only accept a credit score that is more than 670. Anything under this is considered a bad credit score.
You see, this happens because lenders use a credit score to check if the applicant is credible enough to be approved for a loan. The Fair Isaac Corporation (FICO) calculates it by analyzing the credit report maintained by the three nationwide credit bureaus, Equifax, TransUnion, and Experian. Read on as we discuss bad credit scores in more detail and how you can fix yours.
What is a Bad Credit Score?
Here is what the credit score range looks like:
300-579: Poor
580-669: Fair
670-739: Good
740-799: Very Good
800-850: Excellent
This range is provided by FICO, and they give you a credit score after analyzing several factors like your credit history, the total amount owed, length of credit history, credit mix, and new credit.
So, if your credit score falls below 580, you have a bad credit score. However, it’s not the end of the world. With some dedication and hard work, you can improve your credit score and bring it right back up.
How to Improve Your Credit Score?
Here are some ways to fix your bad credit score.
Check Factors Affecting Your Credit Score
First of all, you need to check your credit score. When you do, it will show you the factors affecting your credit score. These factors contribute to the credit score in the following proportions:
- Your credit (payment) history – 35%
- Total credit owed – 30%
- Length of your credit history – 15%
- Credit mix – 10%
- New credit – 10%
That said, according to a study by the Federal Trade Commission, it is pretty common (one in five people) to have an error on at least one of your credit reports. Hence, it is essential to check for any discrepancies in order to eliminate any mistakes that may be there. Go through it thoroughly to spot errors that may be there.
Some common errors that people usually find are:
- Errors in personal information
- Errors in reporting account status
- Balance errors
- Data management errors
Of course, if your credit report has errors, then your credit score would need to be changed.
Start Paying Bills on Time
You might have a bad credit score because you aren’t paying your bills on time. As you can see in the factors that affect your credit score, your payment history contributes toward 35% of your credit score. With this in mind, if you haven’t been paying your bills on time, now would be the time to do so. Pay your bills consistently before the due date for several months (at least 6 months), and you will start seeing a shift in your credit score.
Furthermore, to ensure you don’t forget to pay the bills, you can set up the auto-pay option banks offer for recurring bills. However, before you do that, ensure you have enough money in the account to automatically make the payment.
In addition to this, if you find it difficult to pay multiple bills on the same due date, you can speak to your creditors about changing the date. Be open to your creditors so they can facilitate you accordingly.
Also, you may speak to your creditors even when you think you might miss a payment so they are aware of your issues and can lower your interest rate temporarily.
Keep Your Credit Utilization Rate Under 30%
Your credit utilization ratio is the amount of credit you are utilizing. It needs to be under 30%. If your rate is higher than 30%, you are about to over-extend your credit and may have problems paying back your loan in the future.
You can work on this by paying some of your credit in full. Start from those with higher interest rates and go further in order. You can also temporarily stop using your credit cards to ensure that your credit does not keep building up.
Since credit utilization ratio takes contributes about 30% to your credit score, you must make some efforts to bring your ratio down. It will significantly affect your bad credit score in a short time.
Don’t Open Multiple Accounts at the Same Time
FICO checks the number of new accounts you have opened recently and the ones in the process of opening. You must avoid opening multiple accounts simultaneously because it exhibits the intention of fraud and not paying back the money borrowed. This appears as a major risk, and the lender may even reject your application based on this information.
Besides that, with each account you open, a hard inquiry is pulled to analyze your credit report. This has a minor effect on your FICO scoring. However, if you have a bad score, even a minor change matters greatly. Hence, it is better to avoid opening different accounts at once. You can try and plan it out in a way that allows you to improve your credit score.
Don’t Close Credit Accounts You Have Paid Off
You might want to close your accounts once you have paid the entire loan. However, before you do that, you should know that these accounts build your credit history. Of course, paying off a loan is excellent and very much in your favor. Hence, keep them open so the payment history of the account can play its part in improving our credit score.
Conclusion
It might be challenging to improve your credit score, but it is definitely doable. If making payments is a problem, you can always communicate your troubles to your creditor to ensure your bad credit score does not start giving off warning bells. Furthermore, keeping your credit utilization below 30% by temporarily halting the use of credit cards is also a simple step.
Keep using these tips consistently, and soon you will see your bad credit score turning good.
