Have Bad Credit? Here Are Two Things You Should Do
There are five factors that make up your credit score, but two of them are responsible for a whopping 65 percent all by themselves.
Bad credit loans can be a serviceable way to bridge financial gaps when you encounter a surprise expense, but they don’t make for a great long term solution. In fact, regularly relying on short-term no credit check loans like payday loans or title loans pretty much means that you’re stuck in an ongoing cycle of debt.
Instead, you should look for long term fixes. (And no, we don’t mean opting for bad credit installment loans, although they can be a better option than two-week cash advances.) If you build up your credit score, you’ll be able to rely on better, more affordable kinds of personal loans when times get tough.
Fixing your credit score may not be easy—it’s going to require a lot of work and financial discipline—but the way to do it is fairly simple: There are two main reasons that people have poor credit, which also means that there are main ways for them to fix their scores!
Here’s how your credit score works.
The most common kind of credit score is the FICO score, which grades your creditworthiness on a scale from 300 to 850. The higher your score, the better your credit, with 680 being the rough cut-off point between “good” and “fair” credit.
Your credit score is based on the information contained in your credit reports, which are compiled by the three major credit bureaus: Experian, TransUnion, and Equifax. To order a free copy of your credit report—and you’re entitled to one free report annually from each bureau—just visit AnnualCreditReport.com.
These reports track your history as a credit user over the past seven years. However, some pieces of information, like whether you’ve ever filed for bankruptcy, can stick on your report for longer than that.
Information can also vary from report to report, as some lenders and landlords only report information to one or two credit bureaus, not all three. This means that you could actually have three slightly different versions of your credit score.
Your FICO score is comprised of five main categories: Your payment history (35 percent), your amounts owed (30 percent), your length of credit history (15 percent), your credit mix (10 percent), and your recent credit inquiries (10 percent).
Since your payment history and your amounts owed together make up 65 percent of your total score, it is these two categories that are most critical to fixing bad credit.
1. Start paying your bills on time.
Your payment history is pretty simple: It measures your history of paying your bills on time. In order to have good credit, lenders like to see a pretty spotless history of on-time payment. Even one late payment could cause your score to take a serious drop.
So if you’re trying to fix your credit score, you’re going to need to start paying your bills on time. And then once you start, you shouldn’t stop. Ever.
Build a schedule for all your bills and compare them to your monthly budget. And if you don’t have a budget, here’s a free template and instructions to get you started.
Are all your bills clumped together in such a way that it makes paying them on time difficult? Contact your creditors and see what you can do about switching your due dates to make payment a little bit smoother.
Put as many of your bills as possible on auto-pay. but make sure that you have the proper funds in your account to pay for them’ otherwise, you’ll end up incurring expensive overdraft fees.
And if you still end up paying a bill late, pay it anyway and then contact your creditor, as many have a grace period before they report late payments to the bureaus. If you have a history of on-time payments with them, calling and talking with them should help your case.
If you have any old unpaid bills that have been sent to collections, do something similar. Contact the collection agency and create a plan for repayment. Once the bill is paid, talk to them about having the account removed from your report. It might not work, but it’s worth a shot!
Paying your bills on time is crucial to building and maintaining good credit, but it’s also not a quick fix. It will take a while before all those on-time payments really start helping your score. This isn’t a sprint, it’s a marathon, and its one you’ll have to run if you want to put bad credit behind you.
2. Pay down your outstanding debt.
While your outstanding debts count slightly less towards your credit score than your payment history, they’re also a problem that you can tackle a bit more directly. In short: The faster you pay them off, the sooner your score will rise.
Potential creditors like personal lenders and landlords are wary of lending to people with too much outstanding debt, especially if it’s high-interest consumer debt like credit cards, personal and online loans, etc. So when you’re making a repayment plan, that’s where you should focus.
With the Debt Snowball, you put all your extra debt repayment funds towards your smallest debt, while only making the minimum payments on all your other debts. When that smallest debt is paid off, you roll over its minimum payment towards your next largest debt and continue. With each debt you retire, you have more money to put towards your larger debts!
The Debt Avalanche works in much the same way as the Debt Snowball, but with one key difference. Instead of paying off your smallest debt first, you pay off the debt with the highest interest rate first.
With the Debt Avalanche, you’ll save more money over time, but it can also mean having to wait a while before your first debt is entirely zeroed out, which can leave some people discouraged. This is why the Debt Snowball is structured to prioritized encouraging early victories.
If you don’t have a lot of money to spare in your budget for debt repayment, try looking for a part-time job or side hustle that you can use to earn some extra cash. Like we said up top, the faster you pay off your high-interest consumer debt, the sooner your score will go up!
A better credit score is worth the work.
With a good credit score, you’ll be able to apply for better loans and housing. Instead of getting stuck with high-interest bad credit loans, you’ll be able to apply for an awesome credit card that offers sweet rewards—so long as you make sure to use that card responsibly.
And while you should make sure to balance your credit score with other important financial priorities—like saving for retirement or building up your emergency fund—good credit will help you out in pretty much every facet of your financial life.
To learn more about building a brighter financial future for you and your loved ones, check out these other posts and articles from OppLoans:
- How to Raise Your Credit Score by 100 Points
- Save More Money with These 40 Expert Tips
- 8 Good Habits to Get Your Finances—and Your Life—on Track
- Financial Basics: Expert Tips for Smarter Spending