5 Steps to Fix Your BAD Credit Score (ASAP)

Credit is a Big Deal — Here’s How to Fix Yours

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Your credit score is a powerful tool to help you get ahead financially. However, at the same time, it can work against you.

Lenders look at credit scores and reports to determine whether you’re eligible to receive credit cards, mortgages, car loans, and personal loans.

If you have a good score, you will likely be eligible for a wider variety of loans and lower interest rates, saving you money in the long run.

If you have a bad score, you’ll likely have higher interest rates that cost you more money over time.

You’ll also likely receive less variety in loan options overall. You may even get your applications rejected altogether.

So how do you fix this?

Check your Credit Report

The first step in fixing your credit is to check your credit report.

Credit reports get confused with credit scores, but they’re different; remember, they are not the same thing.

Instead, you can think of a credit report as a permanent high school record.

It’s a record of your financial habits over a period of around 7 to 10 years.

When a lender looks at your credit report, they can see how many lines of credit you have, how much you currently owe, if you’ve missed any payments, if you sought forbearance, and any other negative marks — like accounts in collection, bankruptcy, and foreclosure.

Hopefully, you’ll already know what’s on your credit report, but you need to check it just in case; sometimes errors occur — and sometimes identity theft happens. The only way to know for sure is to check your report.

Get Your Free Credit Report

To get your credit report, all you have to do is visit:

https://www.annualcreditreport.com/

The three major credit bureaus — Equifax, Transunion, and Experian — each create a separate credit report for you.

Usually, they would try to charge a fee for access to this data, but due to federal law, the bureaus are each required to allow you to receive one free copy per year.

However, during the Covid-19 pandemic, all three credit bureaus allow weekly access to credit reports.

At this time, this policy has no definitive end date — but you should be aware that it can end.

When that happens, that probably means things will revert back to the once-per-year policy.

Disputing Errors

So, did you find any errors? No? That’s great.

If you do find something wrong on your report, you’ll want to dispute those errors and get them removed.

You can do this by writing to each credit bureau and explaining the error on your report. You’ll also want to provide any documents to help support your dispute.

You can file a dispute by directly contacting either Equifax, Experian, or Transunion online or by certified mail.

According to the Consumer Finance Protection Bureau (CFPB), the credit bureau that you wrote to must respond to your letter within 5 days if they find that your dispute is “frivolous” — or in other words, a lie.

They must investigate if you don’t hear from anyone within that period.

Once the investigation is concluded, they may find that the information was incorrect. In that case, they will update the information on your credit report and inform other credit reporting agencies of these changes.

Remember, it’s also possible that they may find the information accurate all along. In this case, you can request they include a statement that explains the dispute in your credit file.

For more information on how to dispute an error, visit the Consumer Finance Protection Bureau’s page at: https://www.consumerfinance.gov/ask-cfpb/how-do-i-dispute-an-error-on-my-credit-report-en-314/

Pay off Late Payments

The second step to fixing your credit is to pay off your late payments (if you have any).

More importantly, though, you want to avoid late payments altogether.

Payment history makes up 35% of your credit score. That’s over one-third of your total score, which means it packs a serious punch.

You can expect your credit score to significantly drop if you miss even one payment. And, even after you catch up on those late payments, they will continue to negatively impact your scores for years.

So again, I beg of you, don’t make late payments!

The good news is that late payments are not reported until they are 30 days past due. So if you’re worried about a payment that is only 1 day late, you’ve got nothing to worry about.

On the flip side, once you have a 30-day late payment, things only get worse the longer you wait. You will continue to feel the pain with 60-day, 90-day, and 120-day late payments, which will crush your credit score more and more.

So, what’s the best course of action? Pay off your late payments immediately and continue to pay the rest of your bills on time, every time.

Pay Down Maxed Out Accounts

In this third step, you’ll want to look at how much debt you’re using, and you’ll want to pay down any maxed-out accounts.

The second most significant factor that makes up your credit score is “amounts owed.” This category makes up 30% of your credit score — again, nearly a third.

Now, you may be worried that the total dollar amount you owe affects your score, but that’s not exactly the case.

While the total dollar amount you owe may be considered, as well as how many credit cards are close to being maxed out, your total credit utilization rate is looked at a lot more closely.

Credit utilization rate may sound fancy, but it measures all the debt you owe vs. your total credit allowance.

Finding Your Credit Utilization Rate

For example, let’s say you have 3 credit cards, each with a credit limit of $5000. This would give you a total credit allowance of $15,000.

Now let’s say that you don’t owe any money on one of these cards, but you are carrying a $500 balance on each of the other two.

To find your credit utilization rate, we would divide your total balance owed ($1000) by your total credit allowance ($15,000).

In this scenario, we’ve found that you’re only using 6.7% of your total available credit. This is your credit utilization rate.

The Ideal Rate

Financial gurus have suggested keeping your credit utilization rate under 30% for decades, but this is a common misconception.

It is true that if you already have a very high utilization rate, then knocking your rate down to under 30% can drastically improve your credit.

Still, that’s not necessarily the best advice that’s out there.

Instead, keeping your utilization rate under 10% may help you achieve even higher scores.

Though it’s important to know, the Fair Isaac Corporation (the creators of FICO scores) states explicitly on their consumer website that, “In some cases, a low credit utilization ratio will have a more positive impact on your FICO Scores than not using any of your available credit at all.”

So — depending on your situation — if you’re thinking about not using your credit at all, you might not want to do that either.

All in all, if you’re looking for quick improvement in your credit score, try getting your credit utilization under 10%.

Collections

In step four, we’ll need to talk about accounts in collections.

Accounts that are more than 30 days late have the potential to go into collections.

There is no hard and fast rule regarding when a lender will sell your debt to a collection agency. Still, you will likely receive more than one delinquency notice before this happens.

And unfortunately, if your debts are sold to a collection agency, this can stay on your credit report for up to 7 years. (Ouch.)

Still, there are ways you can try to fight this.

Fighting Accounts in Collection

First, as I mentioned earlier, you can attempt to dispute any errors (if there are any).

Once you start a dispute, the collection agency must validate your debt. They must remove the collection from your credit report if they can’t validate it.

Second, you can try and pay for removal. If this sounds sketchy to you, it’s because it is.

The truth is—collection agencies buy debt accounts for a fraction of their total value.

This leaves a considerable profit margin for them, so you may be able to negotiate down the amount you must pay them. The theory goes that they would rather collect some profit than none.

Still, paying off your collections debt does not automatically remove it from your report.

If you want to remove it from your report, you can attempt to dispute the account after you have paid it off.

Once you initiate the dispute, the collection agency must validate the debt. In this case, they might not even respond since there’s no longer any incentive to; they’ve already been paid.

The account will be removed from your report if the collection agency doesn’t respond to your dispute.

It’s important to remember that some of these actions can be risky.

So always do your own thorough research before making any financial decisions, and consider asking for the advice of a qualified, licensed professional.

Bankruptcy & Foreclosure

Finally, in step five, we’ll need to discuss the two “Big Bads”: Bankruptcy and Foreclosure.

More than anything else, I’ve heard people talk about Bankruptcy as a way to settle their debts and start fresh.

This is not the case.

Bankruptcy and foreclosure are not “get out of jail free cards.” Both have severe consequences that you will have to deal with for many years.

In fact, both bankruptcies and foreclosures stay on credit reports for 7 to 10 years.

They also both may prevent you from buying a house or car, obtaining any financing at all, and they may even cause your rental applications to be rejected.

These negative consequences can go on for as long as these negative marks remain on your credit report — that’s a really long time.

And it’s for that reason that declaring bankruptcy or allowing your home to fall into foreclosure should be an absolute last resort.

Removing Bankruptcies & Foreclosures

Unlike collections accounts, removing a bankruptcy or foreclosure from your credit report is not easy.

Of course, you can file a dispute if you see any errors. Even then, you can expect this to be a challenging task.

However, if there are no errors and you really did declare bankruptcy or go through foreclosure, there isn’t much you can do.

The best course of action for you may be to wait for these to fall off your report and focus on the things you can change instead.

Just by paying your bills on time, paying off any late accounts, resolving accounts in collections, and disputing any errors on your credit report, you will make a massive difference on your credit report.

That will then create a hugely positive effect on your credit score.

This article was originally published on OhHeyItsRay.com

Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com