Having a bad credit score can feel like carrying a heavy weight around your financial life. Not only can it affect your ability to borrow money, but it can also impact your insurance rates, job prospects, and even where you can live. But don’t worry, your credit score isn’t set in stone. Here are six strategies to help you rebuild your bad credit and get back on track.
Understand Your Credit Score
Before you start rebuilding, it’s crucial to understand exactly what’s pulling your credit score down. Obtain a copy of your credit report from the three major credit reporting agencies: Experian, TransUnion, and Equifax. Thanks to federal law, you’re entitled to a free copy of your credit report from each agency every year. Scrutinize your reports for any errors and dispute them promptly.
Pay Your Bills on Time
Payment history is a significant component of your credit score. Set up payment reminders or automatic payments to ensure you’re paying every bill on time. Even accounts that don’t directly report to credit bureaus, like rent and utilities, can indirectly affect your credit score if they fall into collections, so it’s important to stay on top of all your obligations.
Reduce Your Debt-to-Credit Ratio
Your credit utilization ratio — the amount you owe compared to your total credit limit — should be below 30%. To improve yours, start paying down credit card balances and avoid charging more than you can afford. High balances signal to potential lenders that you’re a high-risk borrower.
Build a Credit Age
Creditors like to see a history of responsible credit use. If you don’t have many credit accounts or your accounts are relatively new, consider becoming an authorized user on a family member’s long-standing, good-standing account. This can help beef up your credit file without the need for more credit checks.
Diversify Your Credit Mix
A diversified credit portfolio shows lenders you can handle different types of debt. Types of credit include credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. However, this doesn’t mean you should go out and open a bunch of new accounts; rather, it’s another reason to manage well the accounts you already have.
Keep Old Accounts Open
Even if you’ve paid off a credit card, consider keeping it open unless it’s costing you money in annual fees. Part of your credit score is based on the length of credit history, so keeping older accounts open can help. Just remember to use these accounts occasionally to prevent them from becoming inactive, which can sometimes lead to closure by the creditor.
Remember, rebuilding bad credit is a marathon, not a sprint. It may take several months or even a year or more to see significant improvement. Patience, diligence, and consistency are key. Stick to these strategies, and over time, you’ll find your credit score climbing back up to where you want it to be.
