Having good credit is essential if you want to obtain a loan for a house or a new vehicle, open a credit account at a retail store or even get a cell phone contract. Even some employers look at credit scores when determining whether or not to hire an applicant.
According to Experian, it’s estimated that 30% of Americans have poor credit, bad credit, or no credit at all. When speaking of credit scores, most reporting agencies use a model that scales credit from 300 to 850, and the cutoff for what’s considered to be bad credit is anything below 499.
Most people need credit at some point in their lives, so it’s essential that you keep your credit score above 661 if you want the benefits of being able to get a loan or open a credit account.
In this article, we’re going to look at what causes your credit score to go down and how to fix it.
What Determines A Credit Score
It’s easy to fall into bad habits and find yourself behind when trying to keep up with your credit score. So, how does one get bad credit? Well, let’s take a look at the factors that go into determining your score.
- Late Payments — 35% of your credit score is determined by your payment history. In fact, it’s the most important factor in determining your credit score. If you’re consistently late with payments, your credit score will remain in the ‘bad’ range. Also, note that bankruptcies and charge-offs fall under this category too.
- Amount Owed — This represents 30% of your credit score and it includes the amounts you owe on each individual account as well as the total amount you owe in relation to the amount of credit you have.
- Credit History — 15% of your credit score is your credit history or how long your accounts have been open and active.
- New Credit — 10% of your score is determined by any new accounts that have been opened and the number of inquiries that have been made to your credit history.
- Types Of Credit — 10% of your score is made up of the varying types of credit you carry; it looks better on your report to have a few credit cards, an installment loan and a mortgage rather than having all of your credit tied up in credit cards.
How To Fix A Poor Credit Score
Now that we know what goes into your credit score, we can look at how to restore your credit.
The first thing to do is to get hold of your credit report and monitor it. You can do this if you have a smartphone by downloading an app that lets you view and track your credit. Most of these apps will even alert you any time you have a change in your score so it’s a good idea to start there because you can’t know where to go if you don’t know where you stand.
Once you’ve seen your credit score and determined it’s in need of fixing, you can set about doing that.
Now that you have your credit report, check it for inaccuracies and dispute anything you see that’s not right. You can dispute these errors you find online, and while there’s no guarantee you’ll be successful, there’s no reason you shouldn’t try.
The first step is to get payments up to date and make them on time; this is the most important step you can take and you must be vigilant. Set up autopay or reminders if you’re forgetful, make sure every payment is made on time.
The next thing you have to do is to work on getting your debts paid down quickly; that may mean paying more than your monthly payment, but whatever you have to do, pay off your balances as soon as you can, starting first with the accounts with the highest interest.
Another thing that can help is getting another credit account. We get it, you’re trying to get out of debt, not go deeper in! But here’s the trick. If you open a new account but don’t carry a balance on it, that increases your credit to debt ratio and will improve your score.
How Long Will It Take?
The good news is that bad credit isn’t forever. If you follow the steps outlined and use credit wisely, your credit score will improve. The short answer to how long it takes is: it depends. It depends on how low your score was, to begin with, and what kind of negatives you had. But you can expect the process to take anywhere from six months to a year. The key is to be patient and keep monitoring your score every month to see the progress.