Are you haunted by a low credit score? Your credit score is an important part of your overall financial picture, and having bad credit can cost you both money and missed opportunities, from paying higher interest rates and insurance premiums to potentially not qualifying for financing when you need it.
If your credit score has become a pesky poltergeist sabotaging your financial goals at every turn, don’t worry. It doesn’t take a magic trick to bring your credit score back to the land of the living: just some good old fashioned time and effort.
Things That Hurt Your Credit Score
There are a variety of factors that can drag your credit score into frightening territory. Here are the primary culprits:
Late payments. That one time you missed a bill or credit card payment? It may have seemed like an innocent mistake, but even one late payment can stay on your credit report for up to seven years. Your ability to pay on time carries the greatest weight when calculating your score, so having late payments can do significant damage. The more missed payments you have, the longer it takes for your credit score to recover.
Carrying a high balance. Just because you have a high limit on your credit card doesn’t mean you should max it out. Using more than 30% of your available credit will cause your score to drop, as it’s a sign to creditors that you may be relying too much on non-cash funds to cover expenses.
Lack of credit history. You know how they say it takes money to make money? In this case, it takes credit to build credit. If you haven’t established a long credit history, creditors don’t have much to go on when evaluating your creditworthiness, which drives your score down.
Applying for credit too often. We know it’s hard to resist those store credit card offers that come with an extra 50% off your purchase if you sign up today, but hear this: You don’t need them. Opening new credit cards or having too many hard inquiries within a short period of time signals you may be a riskier borrower, and those hard inquiries stay on your credit file for two years.
Lack of credit mix. It may seem counterintuitive, but a lack of credit variety will also lead to a lower score. For example, if you have only have revolving credit (e.g., credit cards) and don’t have some form of installment loans, such as an auto loan, mortgage, or student loans, it’s likely hurting your score.
How Your FICO Score Is Calculated
How to Build Back Your Credit Score
The good news is, anyone can repair their credit score over time. Keyword: time. It won’t happen overnight, but by following some simple steps, your score will eventually rise from the ashes.
1. Pay on time, every time. Consistent, on-time payments have the biggest influence on your credit score, so paying your bills when they’re due should be your first priority. Set up automatic payments so you never forget to pay a bill.
2. Pay off any overdue amounts. Next, work to get all of your accounts in good standing. Pay off anything that is past due as soon as possible to prevent it from further damaging your score.
3. Reduce your debt. If your credit card utilization (i.e., the amount of credit you’ve used vs. how much you can borrow) exceeds 30%, pay down that debt as much as possible. Once you get it to the 30% mark, you should see a boost to your score, and the more that credit utilization ratio goes down, the more your score will go up.
4. Review your credit report. You’re entitled to receive one free credit report each year, and you should review it to ensure there are no inaccuracies that are tarnishing your credit reputation. If you do spot errors, dispute them. As a best practice, sign up for a credit monitoring service to keep an eye on changes to your credit report and score throughout the year.
5. Don’t apply for new credit. Until you get your score back to a healthier place, it’s best not to take on new debt, for several reasons:
It’ll mean another hard inquiry, which will knock your score down a bit.
It may increase your debt obligation, which can make it harder to pay off existing debt and sabotage your efforts to boost your score.
It will increase your debt-to-income ratio (DTI). If you’re working to improve your credit so you can apply for a mortgage, your DTI should be about 43% or less.*
You run the risk of not qualifying and being denied credit, or having to settle for less desirable terms and interest, which costs you more in the long run.
What If Your Credit Score Is Nonexistent?
So you’ve got a phantom credit score: that is, you don’t have one. This is perfectly normal when you’re just getting started with establishing credit. But as mentioned before, it takes credit to build credit. To do this, you can either apply for a secured credit card (in which you put down a security deposit as collateral), become an authorized user on someone else’s account, or have someone co-sign on a loan. Once you’ve been extended credit, follow the tips above diligently to build your score and keep it high.
Easing Back In
At what point is your credit score high enough that you can start using credit again? That answer really depends on your goals and what you need credit for. But the best place to start is by seeing what range you’re in.
FICO Score Ranges:
Exceptional: 800-850
Very Good: 740-799
Good: 670-739
Fair: 580-669
Very Poor: 300-579
If feel you’re ready to apply for credit, start small. Don’t run out and get three new credit cards at once. Only apply for what you need, whether that’s a credit card, a personal loan, or an auto loan, and handle it responsibly by keeping your balance low (if it’s a revolving credit line) and making all of your payments on time.
Creating a history of consistent, steady payments takes time and patience, but it’s what will help you continue to build a strong credit score — and keep it that way.