A strong credit score is important for many reasons. For example, it can help you qualify for credit card and loan offers with attractive interest rates and terms. You may also have access to better housing options, whether you’re looking to rent or buy. Or it can help you avoid hefty deposits required by landlords or service providers if you’re a credit-challenged consumer. In some states, insurance providers use credit-based scores to set premiums, which means a higher credit score could potentially qualify you for affordable coverage.
Unfortunately, there are times when financial circumstances arise that negatively impact your credit health. If you can relate, chances are you’re seeking ways to raise your credit score sooner than later. Or maybe you recently discovered your credit score was much lower than you thought, and it caused you to be turned down for credit.
The upside is that repairing your credit is not an impossible feat. However, it could take some time, depending on what’s in your credit profile. Read on to learn more about how having bad credit can negatively affect your life and what you can do to get back on track and start making the right moves to boost your credit score. This guide also dives into credit repair companies and how to choose if hiring one is a sound decision.
The Effect of Having Bad Credit
Bad credit isn’t the end of the world. Still, it can negatively impact many areas of your financial life, making it very challenging to achieve your financial goals. Here’s a closer look at some of the most significant downsides of a poor credit score:
- Access to loans and credit cards: The most prevalent downside of a poor credit score is the inability to access loans and credit cards with competitive terms and interest rates. This is due to the risk of default you pose to the lender – it’s much higher with a lower credit score. In some cases, borrowers face challenges getting approved altogether or are forced to settle for secured credit products that require some form of collateral to get approved. If you’re lucky enough to find an unsecured loan or credit card product that caters to subprime consumers (or individuals with lower credit scores), expect exorbitant interest rates and fees.
- Housing challenges: Whether you’re looking to rent an apartment, townhome, condo or single-family home, the landlord will likely evaluate your credit profile when you submit an application. A lower credit score could result in an automatic denial or a hefty security deposit requirement. If you’re seeking a mortgage to purchase a home, it’s not impossible to get denied with a lower credit score. In fact, some lenders allow a credit score as low as 580 (or 500 for an FHA loan with a 10 percent down payment). It depends on the loan type, but you will likely pay a premium to access funding in the form of a higher interest rate, which means you’ll have to settle for a smaller mortgage.
- Limited employment opportunities: Some employers also do credit screenings on potential employees before extending a job offer. This is particularly common in financial-related industries or in roles where the employee will handle money or have access to sensitive financial data belonging to consumers. A lower credit score could be a deal-breaker as it indicates to potential employers that you may not be a reliable or trustworthy candidate, even though this may not be the case. Unfortunately, the prospective employer may not be willing to reverse their decision, and you could miss out on a lucrative job opportunity.
- Higher insurance premiums: If you live in a state that allows credit-based insurance scores, your premiums will likely be impacted by a lower credit score. This could apply to auto, renters and home insurance policies you purchase.
Does Your Credit Still Have a Chance?
Despite the negative consequences that are often associated with a bad credit score, there are steps you can take to repair your credit. These actions can also help you get your finances back on track and understand how to better manage your money and credit health moving forward—more on how to move forward with restoring your credit shortly.
The Challenge of Repairing Your Credit
It’s no secret – repairing your credit can be overwhelming if you aren’t sure how credit works or where to start. Depending on what’s in your credit profile, it could also take time, especially if there are several items to tackle.
Credit repair companies sometimes lure customers by promising to remove accurate, timely negative information in exchange for a fee. However, these claims are deceptive, and it’s illegal for credit repair companies to behave this way. In fact, the Federal Trade Commission states:
You can’t legally remove accurate and timely negative information from a credit report. However, you can ask for a free investigation of the information in your file and dispute it if you find anything inaccurate or incomplete. You can choose to hire a credit repair company to help them with this investigation, but anything they can do legally, you can also do for yourself if you decide not to hire one.
This means credit repair could take some time. Unfortunately, there are no legal tips and tricks to instantly undo negative marks that are indeed true. Still, it’s possible to start repairing your credit right away and get on track toward a bright financial future. You just have to commit to the process and be willing to do the work until you reach your credit goals. Even after achieving your target credit score, it’s vital to manage your credit to prevent history from repeating itself.
Tips on How to Repair Your Credit
Before diving into specific ways to repair your credit, the first step is to understand how your credit score is calculated. That way, you’ll know which items to tackle when devising a plan of action to repair your credit.
The FICO credit scoring model is the most prevalent in the industry. It’s used by more than 90 percent of lenders and creditors to make a lending decision. Here’s how it’s calculated:
- Payment history: 35 percent of your FICO score
- Amounts owed: 30 percent of your FICO score
- Length of credit history: 15 percent of your FICO score
- Credit mix: 10 percent of your FICO score
- New credit: 10 percent of your FICO score
There’s also the VantageScore 4.0 model. It isn’t as popular as FICO, but you should understand how it works as it’s beginning to rise in popularity:
- Payment history: 41 percent of your VantageScore
- Depth of credit: 20 percent of your VantageScore
- Credit utilization: 20 percent of your VantageScore
- Outstanding credit balances: 11 percent of your VantageScore
- Recent credit: 6 percent of your VantageScore
- Available credit: 2 percent of your VantageScore
FICO scores range from 300 to 850 – the higher, the better. Below is a breakdown of what the figures mean:
- 300 to 579: Poor FICO Score
- 580 to 669: Fair FICO Score
- 670 to 739: Good FICO Score
- 740 to 799: Very Good FICO Score
- 800 to 850: Exceptional FICO Score
VantageScores are also between 300 and 850. Like FICO scores, the higher the score, the more favorable you look in the eyes of lenders. Take a look at how these scores are categorized:
- 300 to 600: Subprime VantageScore
- 601 to 660: Near prime VantageScore
- 661 to 780: Prime VantageScore
- 781 to 850: Superprime VantageScore
Once you understand how the different credit-scoring models and how your credit scores are categorized, it’s time to delve into specific ways to start repairing your credit. Follow the guidance listed below to help streamline the process.
Get a Copy of Your Credit Report
Get a free copy of your credit report from each of the major credit bureaus – Experian, TransUnion and Equifax. Visit AnnualCreditReport.com to request your free copies, or call 1-877-322-8228. Historically, consumers could access one free credit report from each credit bureau on an annual basis now. However, this restriction is currently lifted, and you can get a free copy of each credit report weekly through the end of 2023.
Review Credit Report Items
After downloading or receiving each of your credit reports, review them from start to finish. Circle or highlight any negative or outdated information that could be dragging your score down. Here are some common credit report errors to look for per the FTC:
- Identity errors: include incorrect names, phone numbers or addresses listed on your credit reports
- Incorrect account status: includes accounts that are reported as open that are actually closed, ownership errors, payment history errors and duplicate account reporting
- Data management errors: include inaccurate or unverifiable credit entries that were removed and inadvertently reinserted into your credit report and duplicate accounts listed under various creditors
- Balance issues: include overstated or understated balances or incorrectly reported credit limits
Dispute and Fix Any Errors
Once you’ve compiled a list of credit report errors, contact the information furnisher (or company that provided the information) and ask that it be corrected. You should also file a dispute with the appropriate credit bureau(s) to have the issue(s) rectified. Below are your dispute options by credit bureau:
- Online: Visit www.experian.com/dispute and follow the guidance provided on the website.
- By Mail: Send the dispute form and supporting documents to Experian, P.O. Box 9701, Allen, TX 75013.
- By Phone: Call 866-200-6020 to request a copy of your credit report or inquire about filing a dispute.
- Online: Visit https://www.transunion.com/credit-disputes/dispute-your-credit to get started.
- By Mail: Send your written dispute and supporting documents to TransUnion Consumer Solutions, P.O. Box 2000, Chester, PA 19016.
- By Phone: Call 800-916-8800 to speak with a representative who can start the dispute process for you.
- Online: Visit https://www.equifax.com/personal/credit-report-services/credit-dispute/ to start an online dispute.
- By Mail: Mail your dispute request and supporting documents to Equifax Information Services, LLC, P.O. Box 740256, Atlanta, GA 30374.
- By Phone: Call 1-888-378-4329 to connect with a consumer support representative.
Always Pay Bills on Time
It’s vital to pay your bills on time since payment history accounts for 35 percent of your credit score. Also, bring any past due accounts current and keep them current. Doing so demonstrates to creditors that you can responsibly manage your outstanding debt obligations.
Pay Off Balances and Past Due Accounts
If you’re able to pay off any past-due accounts, it’s also worth doing so. Or, you can negotiate a payment arrangement with the creditor to resolve those delinquent balances sooner than later. Otherwise, you’ll likely be inundated with continuous collection calls, letters in the mail and adverse credit reporting that could drag your credit score down even more.
Increase Your Credit Limit
Consider requesting credit limit increases on your credit cards that have lower limits. Doing so can help improve your credit utilization ratio, which is the amount of debt you’re carrying compared to your credit limit.
Keep Your Credit Utilization Low
Also, aim to keep your credit utilization ratio at or below 30 percent – 10 percent or lower is even more ideal to have the best chance at a healthy credit score. To illustrate how this works, assume you have three credit cards with $1,000 limits, bringing your total credit limit to $3,000. You’d want to keep your balances across the three cards at or below $900 (or $300) if possible to help your credit score.
Diversify Your Credit Mix
Creditors and lenders like to see an assortment of credit on your profile. The two types of credit are:
- Revolving credit: credit cards and lines of credit
- Installment credit: personal loans, home loans, auto loans, student loans
A strong credit mix shows you can manage different types of credit. Word of caution: be careful not to take on more credit than you can handle. Otherwise, your plan to diversify your credit mix could backfire.
Avoid Opening New Credit
Each application for credit results in a hard credit pull that can drop your credit score by two to five points. That’s a small impact, but several credit inquiries in a short period could mean even more bad news for your credit score. So, only open new credit if it’s necessary or part of a strategic plan to improve your credit.
Monitor Your Credit
Regularly review your credit report and credit score to ensure the information is accurate and timely. Also, note any changes or improvements you notice over time.
Monitoring your credit profile can also help you stay on track and bring any suspicious activity or identity theft to your attention.
Should You Hire a Credit Repair Company?
It depends on your unique situation and if you’re willing to do the legwork to repair your credit. Either way, it’s vital to understand that you’ll pay monthly fees for credit repair services. Furthermore, results aren’t guaranteed, so you may not get the outcomes you desire even after forking over a sizable amount of cash.
As mentioned earlier, you can take steps to fix your credit without hiring a company. You have the right to request a free copy of your credit report from each of the three nationwide credit bureaus – Equifax, Experian, and TransUnion – weekly through AnnualCreditReport.com or by calling 1-877-322-8228 until the end of 2023. After this point, you’ll have free annual access or can pay the bureaus directly to get copies of your reports. Either way, you’ll have what you need to start the credit repair process.
If you decide to work with a professional credit company, do your research to confirm that it is reputable. Check online reviews from past and current clients. Also, check with the Better Business Bureau (BBB) and refer to the Consumer Financial Protection Bureau’s database to search for complaints related to the company.
The Credit Pros is a company that can assist you in restoring your credit. They can help you with credit report corrections, increasing credit scores, or establishing credit. Accredited by the BBB, they offer a 100% 90-day money-back guarantee, so you’ll be assured that your satisfaction is their priority. Their services start at only $69 per month (with a $119 first work fee), and they offer free consultations with no obligation to sign up. Complete a short form or call (888) 558-1602, and a credit specialist from The Credit Pros will contact you to help you get fast and effective results.
Remember, the process of restoring your credit takes time, whether you decide to use a company or do it on your own. So, be patient, follow through with your plan and continue to responsibly manage your credit to give yourself the best chance of achieving favorable results.