By following the right steps, you can make 2021 the year you repair your credit.
If you have bad credit, increasing your credit score is a great New Year’s resolution.
It’s something anyone can do. It’s easy to track your progress with a free service that shows you your credit score. And it will have a big positive impact on your financial situation. As your credit score improves, you’ll be more likely to qualify for the best credit cards and low-interest loans.
To get started, here’s a step-by-step process that will help you fix bad credit this year.
1. Sign up for a free credit score service
You’ve probably heard that the key to reaching a New Year’s resolution is tracking your progress. If your goal was to lose 20 pounds, you’d need to weigh yourself regularly to confirm that you’re getting closer to that mark.
For that same reason, you need to monitor your credit score. Many credit cards offer free credit score monitoring that’s updated monthly. Even if yours doesn’t, there are plenty of other free credit score services you can use.
Pick a service you like, sign up for it, and check your score every month. Although any type of service works, you may want to choose one that offers your FICO® Score. This is the type of credit score most lenders use.
2. Check your credit reports for errors
Visit AnnualCreditReport.com to request your credit reports free of charge. If you’re wondering why “credit reports” is plural, it’s because there are three credit bureaus (Equifax, Experian, and TransUnion) that keep credit files on you. Since they can have different information, you need to review your credit reports from all three.
Legally, you can request a free credit report from each bureau once per year. But because of the COVID-19 pandemic, they’re all offering free weekly credit reports through April 2021.
If you find any inaccurate information on a credit report, such as an account you didn’t open or a payment that was reported late when you actually paid on time, you should dispute it. You can do so online with each credit bureau. Here are their respective dispute links:
3. Figure out why you have bad credit
Rebuilding bad credit requires knowing what the problem is. The free credit score service you’re using should provide this information for you.
Although credit scores may seem complicated, a bad credit score is usually caused by one of the following:
- You missed a payment. Your payment history is what affects your credit score the most. Creditors can report a late payment on your credit file when you haven’t paid within 30 days of the due date.
- You didn’t pay back what you owed. If you had any accounts get sent to collections or you declared bankruptcy, those will also damage your payment history.
- You’re using too much credit. Your credit utilization ratio also has a big effect on your credit score. This ratio is simply your credit card balances compared to your credit limits. It’s best to limit this to 20% at most. So, if you have $1,000 in credit limits, you shouldn’t carry more than $200 in balances.
Simply put, bad credit is typically due to either a bad payment history, high credit utilization ratio, or both.
4. Work on problem areas
Now that you know what the problem is, it’s time to get to work on fixing it. Here’s how you can do that.
A bad payment history is something you can only fix with time. You can’t erase your past late payments. Instead, you need to add on-time payments. Use a credit card every month and pay the bill by the due date. Every time you do this, you’ll get an on-time payment on your credit file. You may also want to set up auto-pay to avoid missed payments.
If you do this every month, you’ll have 12 on-time payments by the end of the year. Your payment history may not be as good as new, but it will be much better than it was before.
A bad credit utilization ratio is a different story. You can fix this issue quickly. If you’re currently using 80% of your credit, and you get that down to 15%, your credit score should go up quite a bit within one or two months. Here are a few ways to lower your credit utilization ratio:
- Pay down the balances on your credit cards.
- Ask for a credit line increase on one or more of your cards. A larger credit line means more available credit, which lowers your credit utilization. Just make sure you don’t use that extra credit as an excuse to spend more.
- Open a new credit card. This will also add to your credit limits and lower your credit utilization.
5. Build smart financial habits
The ultimate goal is to fix your bad credit and avoid having the same problems in the future. You’ll be able to get good credit, maintain it, and avoid money troubles by developing these financial habits:
- Pay your bills on time and in full every month, including your credit card bill. When you pay in full, you’ll avoid costly interest and credit card debt.
- Never use too much of your credit limit. Aim for 20% or below at all times.
- Follow a budget and track your spending. This will help you avoid overspending and ending up with a credit card bill you can’t pay off.