Having a bad credit score greatly limits your borrowing abilities. Around a third of Americans have a credit score that is below 601 , the number that determines whether or not you have bad or fair credit. With a below average credit score, it’s much harder to get approved for a loan or credit card with favorable terms. Consumers with a low credit score or more likely to face lower approvals along with lower borrowing limits and higher interest rates.
While bad credit is a hard problem to overcome, it’s not impossible. Continue reading to learn 5 ways that you can repair your bad credit and improve your chances of more favorable borrowing in the future.
1. Fix Credit Report Errors
Mistakes happen and on your credit report, a mistake can be quite costly. The first step in repairing your bad credit is to look at your credit report. If you see any issues, such as a credit card you didn’t open or a loan you paid off months ago, you’ll want to start the dispute process. First write a dispute letter and send it via certified mail or online. Typically you’ll hear back from the credit bureau within 30 days of receiving the dispute.
When disputing a problem on your credit report:
- You’ll have to dispute each mistake with all credit bureaus
- Dispute each account separately
- Consider hiring a professional service
Fixing your credit report is unlikely to result in a huge 200 point jump, but removing errors is an important first step in repairing your credit.
2. Pay Off Debt
Debt-to-income ratio is a huge factor when lenders review a credit or loan application. Having high debt-to-income ratio also impacts your credit score. One of the best things you can do as a consumer to improve bad credit is to pay down debt. The most effective method is to pay off your highest-interest rate debt first. As you pay off debt, you can put more money towards other loans and credit cards.
Even if you’re applying for one of the best credit cards for bad credit , lenders still have thresholds that borrowers must meet. By paying off debt, you can give your credit score a boost.
3. Always Pay On Time
A late payment can have a severe impact on your credit score. In fact, paying on time makes up about 35% of your credit rating . When you pay a lender late, they not only charge you a late payment fee, they may also report the tardy payment to the credit bureaus. Lenders typically report a late payment once it is 30 or 60 days late. This mark stays on your credit report for seven years and can impact future borrowing.
Thankfully with today’s technology, it’s much easier to manage multiple due dates. Most lenders offer the ability to set up automatic payments each month. Instead of having to remember when to pay each of your bills, you can use automatic payments that are withdrawn from your account on a set day each month. This makes paying your bills effortless and all but eliminates the risk of a late payment.
4. Pay More Than the Minimum
Looking at your credit card or loan statement, it’s tempting to pay just the minimum balance due, especially when the payment is only $15 or $25. This low payment is especially helpful if you’re facing financial hardship.
The problem with paying just the minimum is that it will take months, if not years, to pay off the total balance due. Paying just the minimum also means that you’re paying more towards interest. Depending on the lender, you may find that paying the minimum balance due results in an increased balance each month.
The smarter option is to pay as large of a payment that you can afford. Putting more money each month means that more money is going towards the principal balance, allowing you to pay off debt quicker than you imagined. As you pay off debt, you can put even more money towards other debt, such as a credit card or student loan.
5. Avoid Further Borrowing Applications
Borrowing can be quite tempting at times. Maybe you’re interested in a store credit card that offers a discount on purchases or you want to purchase a new car which means an auto loan. But, more often than not, it’s best to avoid unplanned borrowing.
Applying for loans or credit cards too frequently will impact your credit score. As a rule of thumb, you want to wait at least six months between applications. While credit inquiries only make up 10% of your credit score , applying too often does impact whether or not a lender approves your application.
By knowing how to repair your bad credit, you can improve your chances of getting approved for a loan or credit card in the future. Though your credit won’t repair itself overnight, the sooner you get started on the process, the better.
If you have any helpful tips or advice for repairing bad credit, share your experience in the comments below.Google+