Understand How Credit Works
Bad credit can be repaired, so don’t lose hope. To get started you should first understand how credit works and how you and getting your current score. A credit score is calculated using different credit data information. Those five data categories that make up your credit score are amounts owed, length of credit history, credit mix, payment history, and new credit (inquiries). The parts that make up the biggest portion of your score are your payment history (35% total score) and amounts owed (30% total score). So in order to get your credit score, they look at both the good and bad things on your record to calculate your score.
The before mentioned categories are not the only thing that goes into whether a lender will allow you to borrow though. Current employment and how long you’ve been there, income, and what kind of credit you are requesting also plays a part. These are just a few of the many things to understand about credit. Once you do that then you can be on your way to fix bad credit.
Check Your Credit Report for Errors
There are be cases where the only reason your score might be low is that there is an error. That error can come in many different ways. The first could be the creditor or lender incorrectly reporting something to the major credit bureaus. Also sometimes identity theft could be the reason your credit is in bad shape. This can happen all year round not just during the holiday season. If you have similar names, social security numbers, addresses, or birthdates to someone else then that could lead to an error as well.
Regardless of the way it happens there is a way to correct it. You should attempt to correct it as soon as possible, the sooner the better. One way to do that is with Annualcreditreport.com. The site provides a free annual report to help you keep an eye on your situation. If you want something a little more often you can also look at sites like Credit Sesame and Credit Karma. The key to finding the errors is consistently checking your reports. If you see a new inquiry you don’t recognize report it. Reports can be made to Transunion, Equifax, or Experian directly.
Pay Your Bills on Time
One of the most important factors when it comes to credit is paying your bills on time. It actually has the highest impact on your score. If you can’t pay your minimum payment on time your credit score will drop. Even one missed or late payment can make a big difference in your score. It makes perfect sense though. Lenders want to know if you’re going to pay them on time, so if you have a bad history of paying your payments in time they’ll be less likely to take a chance on you. Depending on how late the payment ends up being, you can be waiting for a long time for your score to recover. For a 30-day late payment according to FICO it can take anywhere between 9 months-3 years. 90-day late payments take between 9 months-7 years. Where you fall on that range depends on how high your credit score was before the late payment.
Keep Card Utilization Low
Another way to fix bad credit is by keeping your utilization low. Your utilization is what percentage of your total credit limit you are using. The goal is to keep this number under 30%. This is a quick way to help get your score in better shape. Like we mentioned it could be years before your score recovers from a late payment. If you decide to make a big dent in your debt and pay a large sum back your score can be completely different.The more you pay back the more your total utilization percentage will fall.
Communicate With Lenders
Let lenders know if you can’t pay. If something comes up and you’re not able to keep up with your payments keep them in the loop. Some lenders will have a heart and try to work with you. They won’t know you need extra time if you don’t communicate. The assistance they provide might include a payment plan or other form of help. At the very least if you end up with a late fee you can ask the lender for a one time refund. If you’re honest with them, who knows what they’ll say. Maybe they’ll give you a few months breaks or only ask for a small payment. Any sort of relief would be a big help to helping you get back on your feet.