12 Tips for a Bad Credit Makeover (Part 2)

A hand mirror on a blue background with a dollar sign for bad credit repair

OppLoans’ two-part, credit advice blog post comes to a thrilling conclusion.

If it were as easy to makeover your credit score as it was to makeover your friends, then we probably wouldn’t be writing this post. Sadly, your score can’t just take off its glasses and change from a baggy sweater into a well-fitting shirt and be totally transformed. No, making your over score takes patience, determination, and financial discipline.

This is probably why nobody makes movie montages of people paying down their debt, creating a budget, and ordering their credit report.

But where Hollywood has clearly failed you, OppLoans is here to help! If you haven’t checked out Part 1 of this post, then you should totally do that! Once you’ve read tips one through six, you can rejoin us as we continue on with our plan to help you fix your bad credit…


7. Pay your bills on time. Really! 

We talked in Part I about how the amount of debt you have is the second most important factor in your FICO score. Can you guess which factor is the most important?

That’s right. It’s your payment history! This makes up a whopping 35% of your FICO score. (Your “Amounts Borrowed” makes up 30%.) If you can take care of those two factors, you’ll have three-fourths of your credit score on lock, and you’ll be well on your way to good credit!

And what’s the best way to make sure your payment history record is okeedokee? By paying your bills on time.

If you’re someone who has a habit of paying bills late, then you’re going to have to come up with a system. Maybe that means setting reminders on your smartphone. Maybe it means writing in the payment dates on your calendar. Maybe it means tattooing those dates into your forehead so you won’t forget!

(We really don’t recommend that last one. But if you do decide to go the “forehead tattoo” route, just remember to tattoo them backwards so that when you see them in the mirror they’ll read forwards. Don’t ask us how we learned that.)

Even better than just “remembering” your payment dates is to automate your payments as much as possible. Try setting up e-bills through your checking account’s online portal. That way, you can let your debtor’s computer system and your bank’s computer system do all the work for you!

If the reason that you’re having trouble with some of your bills is that they all come due around the same time, leading to shortage of funds, then call your lender or utility company and see if you can have your payment dates changed! This is a pretty common issue, so they’ll likely be able to work something out with you.

“The best way to maintain or build a credit score is to pay your bills on time” says Natasha Rachel Smith, personal finance expert for TopCashBack.com (@TopCashBackUSA). “Before the due date is even better than on the due date. Set reminders for yourself to pay at least the minimum once a month by the due date to avoid late fees or penalties. The more responsible you are with your debt, the better!”

8. Consider refinancing.

Now this is an option that might not work for everybody, but it’s definitely worth a try.

Refinancing a loan means that you take out a new loan to pay off the remainder of your old one. You get a new payment term with a lower interest rate and lower monthly payments.

There are several benefits to refinancing a personal loan. The lower payments certainly help if you have a budget that’s spread thin. That’s extra money that you could put towards important things like debt repayment. Plus, with a lower interest rate you can save money on your loan overall!

Tracy Becker (@tracybecker), President and CEO of North Shore Advisory, Inc, says that “Refinancing a loan can help credit scores since if the interest rates are lowered more dollars are freed up to pay down other debts.”

“High balances on credit cards and other types of lines can have a dramatic negative impact on credit scores.  Also if a refinance also has cash (cash out) that is being used to pay off debt that can dramatically help.”

(Cash-out refinancing generally only happens with mortgage loans. It can occur when a homeowner refinances the loan on a home that has substantially gained in value since the original loan was taken out. By refinancing for more than they amount they currently owe on the home, the borrower can free up extra cash to remodel, pay off higher rate loans, etc.)

Since making your payments on-time helps improve your credit score, taking out a new loan and making all those payments will give you a longer history of on-time payments, thereby helping to increase your score.

“The only negative is the new loan (or account) will reduce the average age of credit and drop the score for a year or so.  The balances being paid off (depending on how high) may offset the drop and even bring the score up much higher,” says Becker.

The reason that this option might not work for everyone is that people with bad credit might not have the option of refinancing. If you can’t get a lower rate on your new loan, it’s probably not worth refinancing. Since a refinanced loan often means paying your debt off at a slower pace, you might be better off paying down your debt more quickly and reaping those benefits instead.

9. Open balances are your friend.

Making your final payment on a credit card is a great feeling. Finally, you’re out from under that debt burden and one major step forward towards having good credit.

Here’s the thing though: Even though you might be tempted to close that card, don’t do it!

There’s a couple reasons why keeping those balances open can help your credit.

First of all, there’s something called your credit utilization ratio that’s an important part of determining your credit score. This ratio measures how much of your available credit you’re carrying over from month to month.

The less of your available credit you’re using, the better. It shows that you are using your credit cards responsibly and aren’t just spending beyond your means by maxing them out.

Let’s say you have two credit cards, one with a $6,000 credit limit and one with a $4,000 limit. That means that you have a total credit limit of $10,000. If you are carrying a respective balances of $3,000 and $2,000 on those cards, then you are carrying a total balance of $5,000. Since $5,000 is one half of $10,000 you have a credit utilization ratio of 50%.

Generally, it’s best to keep your credit utilization ratio below 30%. All other factors being equal, getting your ratio below that mark should lead to improvement in your score.

Now, let’s say that you have a third credit card that you’ve paid off entirely but kept open. This card has a credit limit of $5,000. This means that your total available credit is $15,000. All of a sudden, the $5,000 that you’re carrying on those other cards doesn’t equal 50 percent of your total limit. It only equals 33.3 percent.

By keeping the balance on that third card open once you’ve paid it off, you are improving your credit utilization ratio!

The second reason to keep cards open is that it helps improve the average age of your credit lines. The FICO formula likes to see that people have been able to maintain credit accounts over a long period of time. Take two identical credit cards, one of which is brand new, the other of which has been open for three years. The second card will be weighted more favorably than the card you just opened.

Of course, this doesn’t work if you keep that old card open and then spend a bunch of money on it that you can’t immediately pay down. So if you’re going to do this, it’s a good idea to cut up the physical card. That way, you’ll save yourself from temptation.

10. Squeeze every penny.

If you’re serious about paying down debt, sticking to a budget, and improving your score, then you’re going to have to get creative in terms of how you cut back your spending.

“If you’ve been overspending…don’t beat yourself up. It happens. But now, right now, is the time to tackle it,” says Smith. “I recommend sitting down and looking at the areas where you spend more money than you really ought to. If you notice a pattern, consider cutting back or looking for a cheaper alternative.”

“For example: People tend to overspend on food and going out with friends because they want to be social. You can brainstorm a cheap alternative and consider having friends over for a movie night or happy hour.”

And cutting back on spending doesn’t have to mean avoiding the things you like to do or the food you like to eat. It can also mean putting in the extra legwork to find those things for cheap.

Smith encourages people “to learn how to shop for discounted prices and NEVER pay full-whack for products. You can always find coupons and discounts if you do a little bit of digging. On top of sales and deals, sign up for a cash-back site such as TopCashback.com to receive money back on your online shopping. If you’re going to purchase items online anyway, you might as well get paid for it.”

Lastly, you can always save money by avoiding unnecessary costs.

“Another area where money can drain away is in late payment fees. If you pay five bills past their due date each month, that’s more than $100 spent thoroughly unnecessarily. Adjust that bad habit and you’ll have more money in your pocket,” says Smith.

11. Get a second job.

With all this talk about spending less, don’t forget that you can also help pay down your debt faster by earning more! Getting a side gig is a great way to increase your take-home pay and either put extra money towards your debt or build up an emergency fund so that you can steer clear of predatory payday loans. 

With the rise of the sharing economy–where people charge other people to use their stuff–there has been an explosion of opportunities to make money on the side. You can drive for Lyft or Uber on your weekends or off-hours. You could also rent out your car through service like Turo or your parking space through Spot. If you live in a city and own a car, there’s pretty much always ways to make some extra cash.

If you have extra clothes or clutter lying around, don’t forget that you could sell them online on sites like Craigslist or eBay. If you have tools lying around, you could rent them out through Zilok.

Love pets? Why not get some extra work as a dog-walker or pet-sitter through Rover.com. Handy at assembling Ikea furniture or other household tasks? Rent out your services through TaskRabbit. Those skills from your high school days as a pizza delivery man going to waste? Sign up for Postmates.

You can even make money (though not a ton) taking online surveys! And if you have creative skills, then creating an Etsy store and selling your wares could be just the ticket.

We could go on. The point is this: If you want to earn some extra cash, there are a ton of ways for you to do it.

12. Be patient.

Look. Short of winning the lottery, there’s no “silver bullet” solution for improving your credit score. It’s going to take some time, so you’re best off settling in for the long haul.

The information on your credit report, which is used to create your credit score, generally remains on that report for seven years. (Certain kinds of bankruptcies can stay on your report for 10 years.) As time goes by, old information drops off your report.

So as you pay down your debt and start making your bill payments on time, that new positive info is going to make up a larger and larger portion of the information on your report. As older negative info drops off, it will be replaced with better info, and your score will increase.

So don’t think you can fix your credit score in a month or even a year. Find some room in your budget to treat yourself once in awhile so that you don’t get discouraged or burned out.

If you follow the tips laid out in this post, your score will improve. But unlike a movie makeover, you can’t do it through a quick montage. This makeover is going to take awhile.

Thanks for reading! If you have any credit makeover tips of your own, we’d love to hear them! Let us know on Twitter at @OppLoans.

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Contributors
Tracy Becker (@tracybecker) is the President and CEO of North Shore Advisory, Inc., a leading Credit Restoration, Education and Monitoring Company specializing in Business & Personal Credit Services. Tracy is a FICO Certified Professional & Expert Credit Witness, she has been improving both consumer and business credit as well as educating professionals and individuals for almost thirty years. North Shore Advisory has helped thousands businesses and individuals to have the most opportunity and savings great credit can offer.
Natasha Rachel Smith (@topcashbackusa) is a personal finance expert at TopCashback.com. Natasha’s background is in retail, banking, personal finance and consumer empowerment; ranging from sales to journalism, marketing, public relations and spokesperson work during a 17-year career period. She’s originally from London, UK, but moved to Montclair, New Jersey, USA, several years ago to launch and run the American arm of the British-owned TopCashback brand; a global consumer empowerment and money-saving portal company.