12 Tips for a Bad Credit Makeover (Part 1)
Even if you think your credit score is beyond repair—there are steps you can take to better your financial future!
If you watch any teen movie, there’s always that sequence where somebody undergoes a life-changing makeover. You know that montage of trying on new outfits, getting a drastic haircut and adding (or removing) bangs, and finally a scene where our main character removes their glasses and realizes that yes, they are in fact super hot?
Well, if you have bad credit—which means a FICO score below 630—then your creditworthiness could probably use a makeover too. That’s why we’re here! We’ve got some fantastic, detailed tips for how you can turn your bad credit from zero to hero. (Is that how teens talk these days. Is that appropriately fleeked?)
This post is only Part I of the list. It includes tips one through six. Keep an eye out for Part II dropping later this week!
1. Stay away from hard credit check loan and credit card applications.
When you apply for a new personal loan or credit card from a traditional lender, the lender performs a “hard check” on your credit. This means that they pull up a full copy of your credit report to assess your creditworthiness, and that inquiry or check gets noted on your credit history.
“Recent Credit Inquiries” comprise 10 percent of your overall FICO score. Searching for new credit can be a sign to lenders that you might be mismanaging the credit you already have. That’s why these checks can ding your credit score for up to two years after they appear on your report.
So unless a credit application is 100 percent necessary, you should stay away from applying for new loans and credit cards while your credit is already bad. If you’re really in a bind, you should look to get a loan from a “soft” credit-check lender. These checks won’t hurt your credit score, and soft credit check lenders are more likely to lend to folks with not-so-great credit.
2. Find a better credit utilization ratio.
Natasha Rachel Smith, personal finance expert for TopCashBack.com (@TopCashBackUSA) says, “Credit scores are largely affected by your credit utilization ratio (that is, how much of the total credit that’s available to you is in use) and payment history.
Since credit cards have become such a major part of modern personal finance, credit utilization is an incredibly important factor in determining a person’s creditworthiness. Unlike traditional loans, credit card borrowers are given a maximum amount of money—called a “credit limit”—that they can borrow up to with their card. Borrowing far below your credit limit is a good sign to lenders that you are using your credit cards responsibly.
“A good credit utilization ratio is less than 30 percent. Under ten percent is ideal,” says Smith. Once you exceed 30 percent, you may be seen as a risk to a lender and could potentially be denied a loan or credit card.”
“A great, speedy way to raise your credit score is to make sure you are spending within your comfortable means so you don’t slip over a 30 percent credit utilization ratio.”
3. Get rid of your debt with one of these methods.
If you have a bad credit score, then you probably have too much debt. Your “Amounts Borrowed” make up a 30 percent of your FICO score, which means that too much debt is going to have a much bigger effect on your score than most other factors.
So if you’re serious about fixing your bad credit, you’re going to need to pay down some of that debt. Easier said than done right? That’s why you should look at two of the most popular debt repayment methods: the Debt Snowball and the Debt Avalanche.
Both methods involve saving up a chunk of money beyond your monthly minimum payments and then focusing all that extra cash on one loan or credit card. One that debt is paid off, you then take that cash plus the monthly minimum for the now-retired debt, and putting all that money towards your next debt. With each debt that you pay off, you get more money to put towards your other debts.
The difference between Snowball and Avalanche methods come with how you decide to order your debts. With the Snowball method, you pay off your debt with the lowest balance first and then work your way to the debt with the highest balance. With the Avalanche method, you start with the debt that has the highest APR, and then work your way towards the debt with the lowest APR.
Both methods have their benefits and their drawbacks. To learn more about them, check out these OppLoans blog posts:
4. Cut back on your spending by starting a budget.
At its heart, having a bad credit score means that you have had trouble with managing your money. That’s how you’ve ended up with too much debt, failing to make your bill payments on time, or having to take out a bad credit loan. That’s why a lot of the advice we’ve doled out already is really just advice for how to better manage your finances.
So if you are trying to fix your bad credit, one of the best things that you can do is take control of your financial situation through starting a budget. Budgeting will allow you to plan for how your money gets spent; it will let you see areas where you can cut your spending back; it will help you pay your bills on time, and it will help you put money aside to start tackling your debt.
“Sit down and take a hard, deliberate look at your finances and plan your month’s expenses,” says Smith. “Budgeting will allow you to pay down debt while saving smartly.”
She recommends, “Minimize your spending habits by budgeting your costs in three categories that are the most important: bills, savings and living expenses such as rent and food. Cut your spending by not buying things you simply want; focus on the things you need.”
If you want to start a budget but aren’t sure where to begin, then Smith has a good strategy. It’s called the 50/20/30 rule:
“You should spend only up to 50 percent of your after-tax income on essentials, such as housing and food; 20 percent on financial priorities, such as debt repayments and savings; and 30 percent on lifestyle choices, such as vacations. Don’t splurge in other categories as costs can add up quickly!”
“A great budgeting tip I have found is to take out all your grocery money for the month in cash, when the cash is gone you have to get a bit creative in the kitchen. This helps with overspending on food every month. This money could then be applied towards paying off your debts to help improve your credit score as well.”
You can also learn more about setting and meeting your budgeting goals in OppU, our online finance course.
5. Check your credit report for blemishes.
If you want to fix your credit score, then you pretty much have to get a copy of your credit report. After all, all the stuff that’s dragging down your score is stuff in that report. You can’t fix your score without knowing what factors are dragging it down in the first place!
However, there’s another reason why it’s good to request a copy of your credit report, and that’s because it might have errors on it that are unnecessarily lowering your score. Credit reports are compiled by the three major credit bureaus—Experian, TransUnion, and Equifax—a process that involves getting information from thousands of different businesses on hundreds of millions of different borrowers nationwide.
So yeah. There are going to be some mistakes.
Don’t worry though! Here’s the good news: you can access your credit report for free and dispute any errors that you find directly with the bureau. Under federal law, the three major bureaus have to provide you with one free copy of your credit report per year upon request. Just visit AnnualCreditReport.com to request a free copy of your report.
If you find an error on your report, you can check out this online resource from the Federal Trade Commission (FTC) for a guide on how to dispute it:
And even if you don’t find any errors, checking your credit report is something that you will want do regularly from now on. That way, you can stay on top of your financial reputation.
“Since you are entitled to one free credit report from each credit reporting bureau, consider ordering one of your credit reports from one of the credit reporting bureaus in each four-month period during a calendar year. This way, you can monitor your credit for free throughout the year.”
6. Run from predatory payday loans!
The road to fixing your bad credit can be a pretty narrow one. Walking it successfully means taking a lot of positive steps, but it also means avoiding a lot of negative ones. One wrong move and you can find yourself right back where you started.
Taking out a payday loan could definitely undo all the hard-won progress you’ve made.
These are short-term loans, often meant to be repaid with a single payment only two weeks after they are issued. As these loans are primarily aimed at people with bad credit, the interest rates are high.
How high? Try an APR of 400 percent!
Beyond those ridiculous annual interest rates, payday loans have another problem, too, and that’s their lump sum repayment structure. Instead of paying the loan off in a series of small, manageable payments, payday loans require you to pay the loan off all at once.
Add lump sum repayment up with short terms and high interest rates and it’s no wonder that so many payday loan customers have trouble paying their loans off on time. Instead, they are forced to roll the loan over, receiving another repayment period at the cost of an additional interest charge (read more in our article The High Cost of Payday Loans).
It’s all too easy for payday loan borrowers to end up getting stuck in what’s called a “Cycle of Debt.” This means that they keep extending their payday loan or they pay the loan off and then taking out a new loan immediately after to help cover their costs. They never get close to paying their debt off, they simply pay more and more interest every time the loan comes due. It’s like the loan is slowly bleeding their money dry.
And guess what? Being stuck in a payday debt cycle is not going to help your credit! Either it’s going to be sucking away money that you could put towards better things, or you could default on your debt entirely and get sent to collections! That collections agency would then likely report your unpaid account to the credit bureaus, and they might even take you to court to have your wages garnished, another action that would get recorded on your credit report.
If you have bad credit though and need a loan for emergency expenses, consider looking for a more reputable bad credit lender, like OppLoans, that will offer you lower rates, more manageable payment terms, and better customer service than your typical payday lender.
That’s it for Part I! Keep a look out for Part II dropping later this week to help make your credit makeover complete! In the meantime, follow us on Twitter at @OppLoans.