How to Fix Your Credit Score
When it comes to finances, there's something even more important than your income: your credit score. Your credit score is an assessment of your creditworthiness expressed as a number from 300 to 850. It's what banks, stores, and other lenders use to decide whether to give you a car loan, home mortgage, or credit card.
While you may not be turned down for a low score, you will be seen as a greater risk. That means lower credit limits, higher interest rates, and larger security deposits. Over the lifetime of a loan or line of credit, those higher costs can add up.
The good news is that you can improve your credit score. Read on to learn how your credit score works, how it's calculated and some steps you can take to fix it.
How your credit score works
Your credit score is a number from 300 to 850 that shows how responsible you are with money. It is based on factors including how often you have paid bills on time, how much money you owe, and how many types of credit you have. This number can help or hurt you when you try to borrow money for things like a car or a house.
How is my credit score calculated?
Your credit score is calculated using these five factors:
- Payment history: whether or not you’ve made on-time payments
- Amount owed: the percentage of available credit you’ve used
- Length of credit history: how long you’ve had your accounts open
- Credit mix: how many different types of accounts you have
- New credit: how many times you applied for new credit over the past two years
Credit bureaus will incorporate these components when calculating your overall credit score, which can range from 300 (a poor credit score) to 850 (an excellent credit score).
Why it’s important to fix your credit score
Your credit score is an important number in your life. It can determine whether you can qualify for a loan, how much you’ll have to pay for that loan, and even whether you can get a job.
If your credit score is low, it will be more difficult and expensive for you to borrow money. You may also have trouble getting approved for a job or an apartment. So, it’s important for borrowers to fix their credit score if it’s not where they want it to be.
How can I fix my credit score?
Here are some ways you start working to fix your credit score:
#1: Review your credit report
Start by getting a copy of your credit report from each of the three main credit bureaus – Experian, Equifax, and Transunion. By law, you're entitled to one free report from each of them every year. You want all three because they can contain different or conflicting information.
Review the credit reports by confirming information such as your name, birth date, and address, then check the status of current accounts. Are the balances and payment details correct? Does it include accounts or defaults you don't recognize? Generally, late payments, bankruptcies, collections, or judgments should only remain on your credit report for seven years.
#2: Fix errors on your credit report
You can quickly improve your credit score by removing or correcting inaccurate information on your credit report. Small errors can turn into big credit problems and many people find mistakes or discrepancies on their credit report with a quick look. If you see any errors, fix your credit report by writing to the reporting agency and providing bank statements or other evidence. If you see the same mistake on more than one report, you have to inform each company separately.
#3: Pay your bills on time
Since payment history contributes up to 35% of your credit score, paying your bills on time is the best way to improve your credit score. Setting up automatic payments can take the hassle out of paying your bills and also helps you plan your monthly budget. As time passes and your payment history stabilizes, creditors will begin to see you as a healthy risk, reflected by a growing credit score.
#4: Increase your lines of credit
Your Credit Utilization Rate generates 30% of your credit score. This rate takes the amount of credit you have earned (through loans and credit cards) and divides that by the amount of debt that you currently owe on those lines of credit. For example, if you have a credit limit of $10,000 on a credit card and owe $7,500, your Credit Utilization Rate will be 75%.
Credit companies prefer to see rates under 40% — and the lower the rate, the safer risk you are for lenders. If you are working through Step #3 and paying your bills on time, you should be reducing your amount of debt. But you can also increase or maintain the amount of your credit lines by (1) requesting additional maximum credit limits from your cards in good standing and (2) keeping your credit cards open — even if they are paid off. The takeaway: push your limits high, and keep your balances low.
#5: Pay down credit card debt
Really want to fix your credit score? Pay off credit card debt. Compounding interest can make it tough to catch up, so you have to stop using the cards. First, determine which card charges the highest interest. Pay off this card first, since it's the most expensive. Put most of your available payment budget against this card (paying more than the minimum balance if you can) and pay the minimum on your other cards.
Once the high-interest card is paid off, roll those same monthly payments into the card with the second-highest interest rate, and so on. As your balances decreases with this snowball approach, your Credit Utilization Rate will go down and your credit score will go up.
#6: Avoid getting new credit cards
At this point, you might think that opening new credit lines to increase your available credit is a good idea, but it's not. It's not. It's a bad idea. Adding new cards will reduce the average age of your credit accounts, a factor that contributes to 15% of your credit score. In addition, applying for credit triggers a hard credit inquiry on your credit report. Each hard inquiry slightly lowers your score for as long as a year. Creditors don't want to see you opening a lot of accounts. Lenders want to see that you can reliably manage the credit that you already have.
How long will it take to fix my credit score?
The amount of time it will take to rebuild your credit history and fix your score can vary, depending on what negatively impacted your score. But whether your credit score is low because of missed payments or closing your credit card account, it may take some time to bring up your score. By taking the necessary steps, like paying down your debt and making on-time payments, you will ultimately see an improvement in your credit score.
What to do once you’ve fixed your credit score
Once you've fixed your credit score, you should check it regularly to make sure that there are no errors and that your score is still on track. As mentioned before, you can get a free credit report once annually from each of the three main credit bureaus – Equifax, Experian, and TransUnion. If you see any mistakes, it’s important to dispute them with the credit bureau as soon as you can. And if your score has dipped, take steps to improve it so that you can qualify for good interest rates and terms on loans in the future.
Fix your credit score today
Why wait to fix your credit score? Get started right now. By taking these practical steps, you can take control of your financial life. As always, it begins by knowing what you're up against and where you stand. Armed with that knowledge, you can plot a course to take you where you want to be financially. And on your terms.
Do I need to fix my credit score to qualify for a loan?
If you need funds to cover expenses now, you may be wondering whether you need to fix your credit score first. Luckily, many lenders offer loans to borrowers with poor or fair credit. They offer less strict requirements and consider other factors like income, employment history, and current debts. So, you may not need to fix your credit score to get the funds you need.
You don’t need a good credit score to get an Advance America loan
If you need to get a loan but don’t have good credit, Advance America can help. We offer installment loans, payday loans, and other options that you could get approved for with poor or fair credit. Once you fill out a quick application in-store or from the comfort of your home, you may get an instant decision and receive your funds that same day.*
* Online approvals before 10:30 AM ET (M-F) are typically funded to your bank account by 5 PM ET same-day. Approvals after 10:30 AM ET are typically funded in the morning the next banking day.