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Financial First Aid: Repairing Your Credit Score

Do you have to take a deep breath whenever anybody mentions the dreaded credit score? Many of us have run into unexpected challenges when trying to maintain good credit. It sounds so simple but it can also be simple to mess up, with long-term consequences for your financial future.

Your credit score is made up of five big pieces of criteria

  • Your payment history (35%)
  • The amounts you owe (30%)
  • The length of your credit history (15%)
  • New credit (10%)
  • Your credit mix or the types of credit that you have (10%)

The best way to build your credit is to manage it well over time, so start rebuilding healthy credit with some careful planning and these seven steps.

1. Triage: Catch up on your credit reports

Before you can fix anything, you have to know what’s broken. A study by the Federal Trade Commission found that almost 25% of people have mistakes on their credit reports. Things to look out for: inaccurate, outdated, or duplicated information.  Make sure that your personal info is all up-to-date, that all your credit limits are listed correctly, and that all of your accounts appear once (and only once). Also make sure that no late payments are listed incorrectly, and that the amount you owe on each account is correct, because those directly influence your credit score.

You can get one free credit report from each of the three bureaus each year: TransUnion, Experian, and Equifax. Space them out throughout the year to monitor your report regularly, and report any mistakes to the credit bureau. Also check with your bank to see if you can check your credit score for free with any of your current accounts or products.

2. Preventive Care: Set up automatic payments

Huge thanks to the digital age for credit support in the form of automatic payments! On-time payments are extremely important to your credit score, so develop a system that will help you stay on track.  Some banks offer email or text reminders, or you can setup minimum payments to automatically withdraw from your bank account. You’re not quite done though – just paying the minimum won’t be enough to manage your money well, so you’ll still have to pay attention to your balances, but it will keep you from racking up any of those dreaded red “Late” accusations on your credit report.

3. Stop the Bleeding: Reduce the amount of debt you owe

So easy to say, and harder to do, but this is a big one. If you have enough credit card debt to speed up your heart rate when you think about it, the first step is to stop using your credit cards. Make a list of all your accounts (which will be listed on your credit report) and take note of how much you owe and the interest rate on each and every one. Design a formal payment plan that pays off the accounts with the highest interest rate, while making sure you still cover minimum payments on all your other accounts.

Start with accounts that are close to becoming past due and pay enough to keep them current. Then work on bringing down your credit card balances. Last, look into paying your charged-off accounts (180 days past due), and your collection accounts (which have been sent to a collection agency). If you pay a charged-off or collection account in full, you may be able to negotiate payment plans, waive some late fees, or make a payment to delete a record, in which you pay in full in exchange for removal from your credit report. To do any of those things, you’ll have to talk to your creditors directly, so do some research in advance. Never hurts to ask.

4. Continue Treatment: Lower your credit utilization

Credit utilization tells you what percent of your available credit that you’re already using. More available credit helps to improve your credit score. You can raise your available credit by either paying down your debt or by getting a higher credit limit. Low balances compared to available credit is what you want, so try to keep your credit utilization below 30% or even 10% if you can.

5. Possible Side Effects: Be smart about credit applications

Yes, “be smart” is pretty vague but there are numerous elements you need to balance to build your best possible credit score. When you apply for credit in the form of a credit card or a loan, the lender initiates a credit inquiry. This is bad for your credit score. On the other hand, having more available credit will help your credit score. You have to balance those rules by being smart about your applications and accounts. Too much new credit all at once without a proven history that you can handle it will be a red flag, while open accounts that you don’t use can be good for your total available credit – as long as those accounts don’t have annual fees or other costs.

6. Comprehensive Care: Rate shop to group credit inquires

If you are ready to take out a new line of credit, for example a mortgage or an auto loan, try to get your shopping done in a 30-45 day window. Most credit scoring models will “group” inquiries in that time frame, so that you don’t take multiple hits to your credit score from each individual inquiry. To reestablish your credit by opening a new account, keep your applications to a minimum until your score improves. If you get denied for a major credit card, there are easier alternatives. These include retail credit cards or secured credit cards. These usually require an initial deposit in the amount of your credit limit but will help you build a positive credit history.

7. Seek Professional Help: Know when to ask for assistance

If you’re having trouble making your payments, talk to your creditors or a consumer credit counselor to see what’s possible. Once you fall too far into debt and interest payments kick in, it can be difficult to climb your way back out. So do what you can today.

Rebuilding your credit score to a healthy level won’t happen overnight, as it usually takes between 60 and 90 days to start seeing improvement.  But every day of caring for your credit is one day closer to more secure financial footing.

 

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