It’s easy enough to destroy your credit score, so shouldn’t it be just as easy to fix it? Unfortunately, it’s not. It will likely take you considerable amounts of time and effort to improve your score if you manage to tank it. For that reason, it’s best to take a firm, disciplined, and responsible approach toward your finances from the get-go. But that’s not how it goes for a lot of people. Bad or foolish decisions can compound, and when we truly need credit to buy a house or help with some unexpected expenses, we’re left high and dry.
So, what can you do? Are there ways to get things back in order? There are — it just takes some planning and discipline. Credit scores are complex, and it’s often hard to know where to start. If you need or want to make some rapid improvements to your credit score, the first thing to do is to understand just what it actually is and how it’s calculated.
Your credit score
A credit score, in the event you don’t know, is a number that’s assigned to you largely determined by how much debt you have and how or if you pay those debts. Essentially, it’s a way for creditors to determine how big of a risk you are when you request credit. If you have a bad score, you’re more of a risk and less likely to get a loan when you need one. That can hurt when you want a credit card, student loans, or a mortgage for buying a house.
As for how it’s calculated? It’s incredibly complex, and there are a number of factors at play. Your credit score is ultimately determined by the number of lines of credit you have, your payment history, the length of your credit history, and the types of credit you’ve used. With that in mind, you can go about taking the steps to improve your scores.
If you want to make some serious headway in repairing your score in a relatively short amount of time, here are three steps to take, as well as some myths you need to know about.
1. Get the financial picture
The first thing you need to do is sit down and put together an accurate, up-to-date portrait of your finances. Pull your credit reports, and see what you’re dealing with. Know what your score is, see what dings you have that are hurting you on your credit reports, and take a tally of all the outstanding debts you have. You’ll need to know whether you have any delinquent accounts out there or debts you might have forgotten about — such as unpaid parking tickets or dental bills that were lost in the fray.
Basically, you just need to know where you stand. You need to know to whom you owe money, how much, and when they need it. From here, you can start to repair your credit score in rapid fashion. This truly is the most difficult part for most people. Sitting down and sorting your finances out can be scary and depressing, especially if you know you’re in a bit of trouble. But things aren’t going to improve until you do it — and taking an honest and hard-line approach is the best way to get it done.
2. Enact a strategy
Now that you know what you’re dealing with, it’s time to piece together a plan. With your goal in mind of improving your credit score, start taking steps to pay off debts and get things in order. Use your credit reports as a guide, as well as the notes you took while getting your finances in order, to enact a strategy to pay things off.
If you can’t make payments, or the payments are too high, don’t hesitate to contact the creditors. They’ll often work with you to lower your payments. Set up reminders for when payments are due, and use a budget to know how much you can pay and when. Basically, you’re going to need to plan out where, when, and how much money you’re applying toward given accounts. It’ll take some time, but once the plan is in place, your life should get a lot easier.
You should also pay off what you can, starting with the most recent debts. Consolidate your debts, and try to restrict how many lines of credit you have open. Ideally, you’ll want to keep your utilization of those credit lines below 10%.
3. Dispute and negotiate
Once you have an idea of what you’re dealing with and a strategy to get back in the proverbial saddle, you can start duking it out with creditors. That means highlighting any errors on your credit report and disputing them. You’ll have to call, write, and spend a lot of time getting it sorted out, but that’s what it takes.
Also, don’t be afraid to negotiate. You can settle some debts for less than what you owe if you’re willing to ask. You can negotiate for other things that will help you improve your score, as well, such as higher credit limits and lower interest rates. This won’t work in every instance, but if you take the fight to your creditors, you really don’t have much to lose. See what you can do in terms of fighting back, as it might be a good way to start cleaning up your credit report.
There are, however, things you might be doing to actively hinder your progress. Myths persist that throw people off the right track, though many seem quite reasonable on their face. A report from Capital One dug into several of them, and we’ll go through the most damaging one by one.
Let’s take a look at some terrible myths surrounding credit …
Those were three tips to follow to improve your credit. Now, here are some myths you might not need to abide by.
Myth: You should close unused accounts
According to the Capital One report, “Nearly a third (31 percent) think that closing unused cards is good for credit.” This actually isn’t true, as older accounts tend to bolster your score and make you more creditworthy. “The average age of your accounts is a significant part of your credit score; keeping your oldest cards open will typically help your score,” the report said.
Myth: Paying your phone bill builds credit
Another myth singled out by the Capital One report: “More than half (53 percent) incorrectly believe paying their cellphone bill builds their credit score.” Unfortunately, it’s not so easy. Paying your bills doesn’t improve your credit score. That’s just being responsible. But if you fail to pay them? That will have an impact on your credit score — but not in a positive way.
Myth: A credit card balance is a good thing
On the subject of paying bills, you should pay your credit card bill. Right? Evidently, there is a lot of confusion surrounding whether you should hold a balance. The Capital One report said more than half of those surveyed thought holding a balance would help their credit score. But that’s not necessarily true, the report said. “Everyone should strive to pay their credit card bill in full and on time every month to build and protect their credit score.”
Myth: Your credit score can’t be rebuilt
“Fifteen percent incorrectly believe that once a credit score is bad, it can’t be rebuilt,” the Capital One report said. This isn’t true either. You don’t want to dig yourself a hole, of course, as it’s tougher to rebuild your credit than it is to start from scratch. But don’t be fooled into thinking your mistakes can’t be reversed. Following our preceding tips is a great way to get started.
Myth: You only have 1 credit score
Remember, you have more than one credit score. Perhaps we should start referring to “credit scores,” rather than going with the singular term. But as the Capital One report said, “Nearly a third (29 percent) of respondents mistakenly believe they only have one credit score.” There are three credit bureaus that serve up credit scores: Experian, Equifax, and TransUnion.
Myth: Checking your score always lowers it
Does the act of checking your score hurt it? No — at least not really. Still, a lot of people think so. “While more than half (57 percent) correctly think checking your credit report will not reduce your credit score, 27 percent believe it will,” the Capital One report said. The truth? “A ‘hard’ inquiry for credit card applications or credit checks can cause a temporary dip in your score, but ‘soft’ inquiries, such as checking your credit score through credit monitoring tools, will not impact your score.”
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