A lot of people can find themselves with bad credit without even realizing. A lender may reject their loan application or they struggle to get a decent limit for their credit card.
Whatever the case may be, there are ways in which you can improve our situation and work on your bad credit. This will take some time and change on your part, putting better habits in place that will help you to avoid future dents on your credit and to boost your score over time.
This guide looks at four tips that you can use to work on your poor credit.
What is a credit score?
A credit score is a metric that credit agencies utilize in order to assess the creditworthiness of an individual. It allows them to quickly gauge your financial behavior. Lenders will always look at this score any time that you are seeking some form of credit, whether it is a credit card, loan or a mortgage.
As lenders will carry out credit searches, you should be fully aware of what these reports will contain. A credit file records all of your past interactions with credit, good and bad.
If you have a poor credit score, this can make it harder for you to credit or you will have to pay higher rates of interest. A lender sees someone with a track record of missing or making late repayments as being a potential liability.
1. Assess your current situation
Your first step should be to assess your current situation. This means getting your hands on your credit report, something you can do for free once a year from each relevant bureau. These reports usually update once per month. Sometimes, there may be glaring mistakes or errors present on this report that caused your credit score to drop.
There may be incorrect or outdated information that leads to mistakes. You should also make sure that older negative information that is no longer relevant is not still contributing to your credit score.
All missed payments should only appear for seven years, with bankruptcies appearing for ten years. You should also double-check to see if any items of debt appear twice on your report, eliminating the duplicate if this is the case.
2. Don’t miss any more payments
One of the most important tips to remember when working on your damaged credit is to not make your credit score any worse. Going forward, you should prioritize meeting all of your debt obligations on time, whether this is credit card bills, loan and mortgage repayments or paying other types of bills.
Taking credit card debt for example, even paying off the minimum each month is a whole lot better than entirely missing a payment. However, you should still strive to meet the entire monthly repayment, as even minimum repayments will negatively affect your credit score.
Some people utilize loans for bad credit in order to help improve their situation. You need to be careful when using loans for bad credit as they often have more restrictions and greater interest rates than normal loans.
People use loans for bad credit when they struggle to get money elsewhere due to a bad credit score. Certain businesses specialize in providing loans for bad credit, such as LoansUnder36, AmOne and LendingTree.
3. Get smarter about using credit
There is a fine balance to strike when it comes to improving your damaged credit score. You want to eliminate your existing debt as much as possible, while also developing a good track record of always meeting credit repayments.
Your first priority before improving your credit score should usually be to pay down your existing debt. While this might be a struggle, it is perhaps the most effective way to improve your situation. Some lenders will allow you to split up your repayments during the month, which may be a more effective approach than trying to pay a single monthly lump sum.
Cutting your debt may require you to become more frugal and to question any purchases you make in a much stricter manner. However, as you see the pile of debt dropping lower and lower, this will have a liberating effect for many people, taking a big weight off their shoulders.
Having available credit is a positive, but you do not want to apply for any new cards. If you have balances on many different accounts, this is not a good look. Every application you submit to get more credit will appear as a hard credit check on your file. If there are too many of these hard checks present over a small time period, this can harm your credit score.
4. Build some good credit
While it may sound counter intuitive to some people, it is not really a good idea to have no credit at all. You want to showcase to potential future lenders that you are able to effectively meet your repayments. If there is no evidence present that you can do so, this can be an issue for lenders, even if you have taken other measures to improve your score.
Even paying the likes of utility bills or a mobile phone contract can gradually boost your credit score. Some people get loans for bad credit in an attempt to prove they can meet repayments.
One of the most powerful ways to build a good credit history is through the use of an interest-free credit card. This type of card requires you to completely pay off the balance each and every month.
Your credit utilization should still be relatively low. For example, if a person has a credit limit of $1,000 and they use about $500 of this credit each month, their credit utilization is 50%. Many lenders will look at credit utilization, with lower percentages going to be a positive.
As you can see, there are many ways that can potentially help improve your bad credit over time, whether it is through loans for bad credit, cutting debt or making repayments on time. The process of doing so takes work and patience, with scores not going to drastically change over night.
However, as time goes on, you will be able to put in place strong financial habits that will stand you in good stead going forward.
By eliminating debt and making repayments on time, you will be taking a lot of stress away from your daily life. When the time comes to get a mortgage or to apply for a loan of some kind, you will be happy you put in the effort to improve your bad credit.