5 Ways You Can Rebuild Your Bad Credit Score
Your credit score reflects your financial health, and just like your physical health, you probably only notice it when it’s bad. Every adult in the US has a 3-digit credit ranking that shows whether their credit is good or bad. A credit score of over 680 is considered good or excellent, whereas a credit score below 600 is well below average. A poor credit score of 580 or lower can seriously affect your life.
Having a low credit score makes you appear to be an unreliable borrower, irresponsible, and a bad risk for any financial issue. As a result, if you have poor credit you’re likely to have trouble getting a loan, mortgage, or auto-financing on good terms or possibly at all. It can also make it hard for you to find a job, rent a house, or find a good insurance deal.
If you discover that you have bad credit, you don’t have to just put up with it. There are a number of steps you can take to improve your credit score, including specific financing options for loan seekers with credit scores below 580.
Here are 5 practical ways to tackle the situation:
1. Dispute negative marks on your credit rating
The first step to fixing your bad credit is to discover exactly how bad it is. There are 3 main credit agencies that prepare your credit score – TransUnion, Equifax, and Experian. You can request a copy of your credit standing for free from each agency once every month. Get hold of your credit score from each agency and look through it to find out the cause of your poor credit score.
You might find a number of specific negative marks against you, which you can dispute to have them removed so as to instantly perk up your credit score. For example, mistaken reports of late payments can creep in, or collections reports due to a disagreement between 2 agencies.
2. Increase your credit limit
One of the ways credit bureaus measure your credit score is by assessing your credit utilization ratio. This refers to the amount of available credit that you’re using, and is a way that you could end up with a poor credit rating even if you never max out your credit cards or miss a payment. For example, if you have a credit limit of $5,000 and carry a balance of $3,000, it harms your credit score. Carrying a balance of more than 50% of your total available credit limit is enough to impact your credit score.
One way to deal with this is to reduce the amount of credit you’re using, but it’s just as effective and often easier to simply increase your credit limit. You might be able to call your credit card company and ask them to raise your credit limit. Once you have a credit limit of $7,500, for example, your balance of $3,000 is no longer a problem. If your credit card company doesn’t agree then you could open up a new credit card. Your credit ratio is calculated across all of your credit cards so adding a new card with a $2,500 credit limit has the same effect as raising the credit limit on your existing card. Just remember not to make purchases with the new card, and try to choose one without any annual fees.
3. Get a loan
It might sound counterintuitive, but taking out one of these 7 types of loans can be a strategic way to fix your bad credit. Lenders or aggregators such as LendingTree offers loans to people with bad and no credit scores. They don’t charge any origination or other fees except for late payment fees, so you can take a loan without any costs aside from the loan amount itself. If you invest the money from the loan strategically you might even be able to make money on your bad credit loan.
Every month, each of these lenders or aggregators, like AmOne, will report to the credit agency that you’ve made your payment on time, so you can see your credit score rise. As long as you pay back the loan on time without missing any payments, your good behavior goes on file to boost your credit score.
Remember that there’s no use taking out a loan with a lender that doesn’t report on your borrowing behavior since if the credit agency doesn’t know about it, it won’t count towards your credit score.
4. Secured credit card
A secured credit card is ideal for fixing bad credit. It’s a credit card that requests a security deposit upfront, which gets held in a savings account for you. The credit limit on a secured credit card is only as much as the security that you put up in advance. Each month when you pay off your balance your credit limit renews itself, but the company keeps a hold of your security deposit in case you default on a payment.
Just like a bad credit loan, you should choose a secured credit card that reports to the credit agencies each month so that you can rebuild your creditworthiness again.
5. Become an authorized user on someone else’s card
One last option is to hitch a ride on someone else’s good credit. If a family member or good friend has a good credit rating that allowed them to have a credit card with favorable terms, you could ask them to add you as an authorized user on their credit card.
As an authorized user you’ll be able to make purchases with the credit card and have your borrowing history recorded against your own name. You can even get useful perks and benefits like travel insurance, auto rental insurance, and air miles points depending on the credit card. As long as you make your payments on time, your credit history will improve.
You might need to find a very good friend, however, since if you default on payments it will affect the cardholder’s credit score as well. The same is true in reverse – if you become an authorized user for a cardholder who has poor financial habits then you could end up suffering even worse credit because of their late payments.
Whether you use 1 of these ways to improve your credit score or all 5, remember that a bad credit rating doesn’t have to be a life sentence. The sooner you start rebuilding your credit rating, the sooner you’ll be able to get loans, credit cards, and insurance deals with the best possible terms.
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