How to Fix Your Bad Credit in 2018
Getting a copy of your credit report and paying down your balances is a great start, but there’s a lot more you’ll need to do.
This is the time of year when New Year’s resolutions start dropping like flies. Look, there goes your friend Becky’s plan to exercise every day! Oh wow, your dad’s promise to read a book a week just plummeted to the ground. Oh dang, did you reinstall the Twitter app on your phone? What happened? You’d been doing so well!
One resolution that shouldn’t be left by the wayside this year is your promise to fix your credit score. That score is one of the most important numbers in your life, and it pretty much dictates your financial wellbeing. Sure, shedding those 10 lbs of belly fat would feel nice, but adding another 50 points to your score would bring real financial benefits for years to come.
Here’s the thing: Fixing your credit score can be difficult, and bad credit doesn’t disappear overnight. It’s a lot like training for a marathon. If you’re in this, you’re in it for the long haul. (Oh, by the way, that marathon you said you were going to train for? Come on now. Let’s be real.)
With all of that in mind, here are five things you can do in 2018 to fix your FICO score and turn your bad credit reality into distant, fading memory.
1. Get a copy of your credit report
If you don’t know why your credit is bad, then you aren’t going to be able to fix it. Since your credit score is based off in the information in your credit reports, then getting a copy of those reports is the place you need to start.
Your credit report is a document that tracks your borrowing history. It has records of what loans and credit cards you owe, how much you owe, whether or not you pay your bills on time, whether you’ve ever been sent to collections or filed for bankruptcy, and more. Information generally stays on your report for seven years, but some information, like bankruptcies, can hang around for longer.
These reports are compiled by the three major credit bureaus: Experian, TransUnion, and Equifax. Your information might differ slightly from report to report, meaning that a credit score based on your TransUnion report, for instance, might be slightly higher than a score based on your Equifax report. But if you have bad credit, it’s a good bet that the major trends are going to be the same no matter which reports you request.
There are five major factors that go into creating your FICO score, but the two biggest factors by far are your payment history and your balances owed. Together, they make up 65 percent of your total score. If you have bad credit, it’s very likely that the problem lies in one of those two categories. Your credit report will give you a clear picture of what exactly is dragging down your score.
Now here’s the good news: You can request a copy of your credit report for free! That’s right. Under federal law, the credit bureaus all have to provide you a free copy of your report every year. All you have to do is request it. To get a copy of your report, just visit www.annualcreditreports.com.
To read more about the importance of checking your credit, check out this post:
2. Pay down your balances
Carrying a massive amount of debt is pretty much the modern American way. According to a 2017 study, the average debt load for a person who attended college is over $49,000, and the average U.S. household carries $16,000 in credit card debt alone.
But just because debt overload is commonplace doesn’t mean your score is immune. While some forms of debt, like student and mortgage debt, are commonly seen as “good” debt, other kinds of debt, like credit card and auto debt, are seen as “bad” debt. (Read this post to learn about the difference.) Carrying too much of them is a surefire way to end up with bad credit.
One of the biggest factors in determining your credit score is your credit utilization ratio – i.e., what percent of your total available credit you’re using at any given time,” says personal finance writer Lindsay VanSomeren (@notoriousDEBT). “It’s best to keep it under 10%, otherwise your credit score could drop.”
If your high balances are dragging down your score, then paying them down is a surefire way to boost your creditworthiness. Balance transfer offers that come with 0% APR can be a great way to make your debt load more manageable and easy to pay off, but those offers are going to be scarce if you don’t already have a good score.
If you’re going to be paying down your debt, you’re going to need a strategy. First of all, focus on your unsecured consumer debt. This means credit cards and personal loans. Second, don’t just throw extra money at these debts willy-nilly. Pick a method of debt repayment and stick to it.
There are lots of debt repayment methods out there, but the two most popular are the Debt Snowball and the Debt Avalanche. Both methods involve putting all your extra funds towards one debt at a time. The major difference between the two is that the Debt Snowball method prioritizes paying off your smallest balance first, while the Debt Avalanche says you should pay off your debt with the highest interest rate.
There are positives and drawbacks to each one. The Debt Snowball gives you early victories that can encourage you to keep going, while the Debt Snowball will end up saving you more money overall. If you want to learn more about the Debt Snowball and the Debt Avalanche, you should read these in-depth posts:
Once your credit cards are paid off, make sure you don’t close them out. Use them properly, and you can reap the financial benefits.
“Most people with high credit scores are able to pay off their credit card in full every month so that they avoid racking up too large of a balance,” says VanSomeren. “A nice side bonus is that you’ll never pay any interest by doing so, meaning you can earn credit card rewards entirely for free!”
3. Pay your bills on-time
Your payment history alone makes up 35 percent of your score. It is is the single most important factor in maintaining good credit. At its core, improving your payment history is simple: Pay your bills in full and on-time. Even one late payment can hurt your credit.
There are a couple different factors that might be making on-time bill payment difficult for you. Maybe it’s a cash flow issue. You don’t have enough money in your checking account when your bills are coming due. If this is the case, you should call your lender or utility company to talk about changing your due date. If you have a record of continually making late payments this might be a difficult ask, but most businesses are willing to work with their customers on this.
Second, it might be an issue of you just plain forgetting to pay them. And, trust us, we know how hard keeping track of your bills can be. Still, if you want to dig out from under a bad credit score, this is non-negotiable.
First, we recommend keeping a spreadsheet or a note taped to the fridge that contains all of your due dates. That way, you’ll have an easy reference point if you find yourself forgetting when something is due. You should also set reminders for yourself on your phone or on an online calendar. That way, even if you forget, you’ll still get a friendly kick in the pants to make you remember.
Some bills like utilities fluctuate month to month. The same can be true for your credit card bills if you’re doing a lot of spending on them—or if the card has a floating interest rate. But for lots of debt, you will have a fixed payment amount every month. With bills like these, you should automate your payments. We’re not saying to “set it and forget it.” This is more like “set it in case you forget it.”
Lastly, if you do pay a bill late, contact your lender or utility company ASAP. A late bill only affects your credit score once it’s reported to the bureaus, and most companies have a grace period before they report a late payment. If you contact them soon after the missed payment and pay the full amount owed (including any late fees) then you should be good to go.
If you miss a due date, don’t ignore the issue and fall into a spike-filled pit of despair. That’ll only make it worse. The same goes for any accounts that you’ve had sent to collections. Being proactive about settling that account will be better for your score than just dodging your bill collector’s calls.
Another option to boost your on-time payments is to sign up for a rent reporting service. For a fee, they will make sure that your rent payments get reported to the credit bureaus.
According to VanSomeren, the cost might be worth it if you have bad credit, but even then you might be better just saving your money:
“I’d only consider paying for a rent reporting service if a) I had a poor credit score, and b) I needed to raise it within a certain amount of time for a large purchase like a home or a car. Even so, I’d carefully consider whether the cost was justified.
“If you can boost your score into prime credit ranges before you buy a mortgage and get the best interest rates as a result of that, it can be worth thousands of dollars in savings over the life of your mortgage since you’re not paying as much interest.
“Otherwise, if you don’t have a large purchase to make within a short period of time, why not just develop good credit habits now and let your score rise naturally?”
4. Build an emergency fund
We want to be clear about this. Building an emergency fund will not directly affect your credit score. This is more of a long-play.
No matter how well you plan and budget for the future, financial emergencies can rear their ugly mug. Your tire will blow out on the highway, or your car battery will die suddenly. Your daughter will break her arm on the jungle gym, or your husband will come down with a flu bug that turns out to be something worse.
That’s where an emergency fund comes in. It’s money that you set aside that is easily accessible and is only to be used in the worst scenarios. Your budget should already include a bit of wiggle room in it, for stuff like dentist and doctors appointments and for yearly car repairs or tune-ups. An emergency fund is for more than that. It’s for the big stuff.
And that’s how an emergency fund can help your credit score. When people find themselves in the middle of an emergency, they don’t tend to think about how much money they’re spending. (And they shouldn’t!) But the tendency in situations like that is to just throw the money on a credit card and to worry about paying it off later.
Behavior like that is how people end up with high balances that they can’t pay off, tanking their score in the process. With an emergency fund, however, they already have all the money they need on-hand. Rather than taking on additional debt, they can pay the necessary bills right then and there.
To start off your emergency fund, aim for $1,000. We recommend that you keep this money in cash in a secure place in your home. Put aside some money every month towards building up your fund. If that means paying down your debt at a slightly slower pace, so be it. A month or two of extra interest payments are worth the security.
Once you reach $1,000, you can start aiming a little higher. Your eventual goal should be six months worth of expenses. That includes rent, utilities, debt payments, groceries, etc. We know, that sounds like a lot. But you don’t have to get there today, tomorrow, or even next year. And once you’ve built that fund up, trust us, the sense of financial safety will be worth it.
To learn more about handling unexpected medical expenses, you should check out:
5. Steer clear of predatory loans
Remember when we mentioned that people will run up their credit card balances during emergencies? Well, some folks don’t have the room on their cards to do that. Instead, they end up turning to predatory payday loans and title loans to get the cash they need.
If you’re trying to fix your bad credit, staying away from predatory loans like these is a must-do.
These lenders mostly target people who already have bad credit, as those are the folks who lack access to loans and credit cards from traditional lenders. People with bad credit don’t have very many options, which is something these lenders use to their advantage, charging their customers ridiculously high interest rates.
Not all bad credit loans are dangerous, but payday and title loans are two types that should definitely be avoided. It’s not just their annual percentage rates (APRs), which usually average around 300 percent or higher. It’s also their short repayment terms, often a month for title loans and two weeks for payday loans.
Instead of letting their customers pay the loan off in a series of manageable installments, these lenders demand that their loans are fully repaid by the date the loan is due. Think about it: If you borrowed $300 at a 15 percent interest rate and then were given just two weeks to pay back $345 (for a total APR of 390 percent), is that something you’d be able to afford?
Many people who take out these kinds of no credit check loans don’t have that kind of money. Instead, they’re stuck rolling the loan over or reborrowing it, racking up additional interest payments without ever getting closer to paying off the loan itself.
This known as a “cycle of debt” or “debt trap.” People find themselves paying far more in interest than they originally borrowed, and sometimes they still end up defaulting on the loan. Some even get taken to court and have their wages garnished in order to repay the loan in full. (Check out this post for more on loan rollover and the payday debt trap.)
Adding insult to injury, even the folks who do pay these loans off on-time don’t get credit for it on their score. These types of lenders don’t report payment information to the credit bureaus, meaning that the only way these loans can affect your score is by getting sold to collections. There’s no way to win. All you can do is lose.
Like we said up top, fixing your credit score isn’t something that’s going to happen overnight. It requires a lot of focus, determination, and self-discipline. But following these five pieces of advice will put you in a good position by the time the year is up. Even if you don’t crack a 720 FICO till December 31st, 2019, you’ll be well on your way to success.
To learn more about your credit score and how you can make bad credit a thing of that past, check out these related posts and articles from OppLoans:
- Credit Workbook: The OppLoans Guide to Understanding Your Credit, Credit Report and Credit Score
- How Bad Credit Can Affect Your Kids’ Future
- Let’s Get “Creducated”!
|Lindsay VanSomeren (@notoriousDEBT) is a millennial personal finance writer living in Fort Collins, CO with a houseful of pets including two cats, a dog, and a husband. She has been a professional dogsled racer, a wildlife researcher, and a participant in the National Spelling Bee. She shows other recent college grads how to manage their money through her own experiences at Notorious D.E.B.T.|
The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.