At a Glance
- Assess: Check your credit score and dispute errors.
- Find your footing: Pay on time and keep balances low.
- Rebuild: Diversify, change habits, and seek credit counseling.
What is a credit score?
Your credit score is a three digit number that credit bureaus assign based on numerous factors (see below). The two most frequently used credit scores are FICO and VantageScore, though there are many other scoring models. Credit score ranges are usually from 300 to 850. The higher the number, the better your score.
Credit scoring factors
Most credit scoring models take the following into account:
- Payment history: Your history of making payments on time, and if you have any record of accounts in collection/bankruptcy.
- The amount you owe: This refers to your credit utilization rate. Credit utilization rate is the amount you owe divided by your available credit limit. Using less credit is better for your overall score.
- Credit history: The amount of time you’ve had accounts open. Having a long account history (with no late payments) is good for your score.
- Type of credit: The mix of different credit types you have, like mortgages and credit cards.
- New credit: The number of new accounts you own or have recently applied to.
Why you have a low score
Some common reasons that you have a low score include:
- Not paying the minimum: If you don’t pay at least the minimum amount, your account will eventually be reported as past due.
- Paying bills late: While one or two late payments won’t kill your score, consistently doing so will.
- Carrying a lot of debt: Owing a lot of money on your cards will hurt your score.
- Having too much revolving credit: Revolving credit refers to credit that you apply for one time, and then use when needed without having to reapply. Having too much revolving credit is bad for your score (but having a high percentage of debt in installment loans is good).
How to build and improve your credit
Building and improving your credit score won’t happen overnight. Our three-phase system, outlined below, is designed to put you on the right path to financial stability.
Phase 1: Assess the situation
Phase 1 focuses on honestly assessing your credit situation and checking your credit reports.
The worst thing you can do in the beginning is get so overwhelmed that you stop trying to repair your credit altogether. Take a deep breath-improving your score is not as scary as it seems.
Check your credit report
It’s time to face reality and review your credit report. Request copies from different credit bureaus and read them carefully. Take note of any mistakes you see.
Dispute errors you find as soon as possible. They could be a major contributor to why your score is low. Make sure to dispute the mistakes with each credit bureau that is reporting them, since notifying one bureau will not fix the mistake with other bureaus.
Phase 2: Find your financial footing
Phase 2 works on tactics to help you fix bad spending habits and improve your credit utilization rate.
Pay bills on time
Make paying bills on time your #1 priority. Set up payment reminders or automatic payments with your credit card company.
Improve credit utilization rate
You can improve your credit utilization rate by keeping your credit card balances low, paying off credit card debt, and being strategic when closing out old accounts.
Open a secured account
Opening a secured account, such as a secured credit card, can give you a head start into building a credit history. You deposit cash into a secured account as collateral, and then can borrow a percentage of the money as credit. It is easier to get approved for a secured account than for more traditional loans or credit cards.
Phase 3: Begin rebuilding
Phase 3 is all about rebuilding your credit and building better financial habits.
Seek credit counseling
Credit counselors educate debtors on the best ways to eliminate debt. Credit counselors might help you create a debt consolidation plan, where you’ll combine multiple loans into a single payment. While this can cause a small, temporary ding to your credit score, your score will quickly improve as you make on-time payments.
Avoid taking on new credit
Opening or applying for new accounts makes you look risky to lenders. In addition, every application shows up as a hard inquiry on your credit report. Too many hard inquiries hurts your score.
Diversify credit accounts
Showing your ability to manage different types of credit can raise your score. Once you have a better hold on your finances, consider adding another type of credit to your current mix, such as
switching your secured credit card to an unsecured one.
Check score on regular basis
Check your score regularly, at least once a quarter, and look into signing up for a credit monitoring service.
How long will it take to improve my credit score?
While it isn’t possible to put a definite time frame on how long it will take for your score to get better, you may start seeing improvements after about 3 to 6 months of improved credit behavior.
Pay off your debt faster and improve your credit score
Use our debt payoff calculator to find the right repayment plan for you.