How to Improve Your Bad Credit Score

If you know anything about my story, you know I changed my whole approach to money and budgeting so I could be free from debt. And while becoming debt-free has made my life so much better, that doesn’t mean I no longer see the value in having good credit.

Credit scores still matter. They can affect your ability to qualify for a loan when you need one. Credit scores can influence how much you’ll pay for financing when you’re approved. Yet even if you’re not borrowing money, like me, there are other ways your finances can be impacted by credit too.

Auto and homeowner’s insurance premiums are often priced based in part on your credit scores. Bad credit might cause you to be turned down for an apartment lease or might mean a higher deposit before you can move in. Credit can even influence whether you have to put down a deposit to open a new utility account or establish new cell phone service.

• Read: Your Credit Report & Score – The Ultimate Beginner’s Guide

What’s a Bad Credit Score?

So, what exactly is considered a bad credit score? A bad credit score is one that costs you money and opportunities.

Most lenders use FICO Scores when you apply for financing, like a mortgage or an auto loan. FICO Scores range from 300 to 850.

Experian says that any FICO Score below 669 is either fair or bad. If you apply for a loan with a FICO Score under 669, you’ll be considered a “subprime” borrower. That means you’ll probably either have a hard time qualifying or the lender may offer you higher rates and worse terms on your loan.

Check Your Credit Score

It’s important to check all three of your credit reports from Equifax, TransUnion, and Experian. Mistakes happen on credit reports and, when they do, they could hurt your credit scores.

Thanks to federal law (the Fair Credit Reporting Act), you’ll allowed to check all three of your credit reports once every 12 months for no charge. Just visit AnnualCreditReport.com to claim your free reports.

But free annual reports don’t include your credit scores. If you want to check your credit scores, you have a few options. First, you can pay to access your credit scores. There are also several places online where you can download your credit scores for free, including Credit Karma.

How to Improve Your Credit Score

When you check your credit scores online, you might find that they’re not in the best shape. It happens. And while bad credit can be discouraging, there’s good news too. You have the power to change your credit situation.

Here are 5 credit improvement tips to help you get started.

1. Dispute Credit Errors — Once you claim your free credit reports from AnnualCreditReport.com, check your reports for errors. If you find mistakes (even small ones), they might be hurting your credit scores.Thankfully, you can dispute credit reporting errors when you find them. This guide from the Federal Trade Commission shows you how.
2. Pay Down Credit Card Debt — Paying your bills on time isn’t enough to earn great credit scores. You also need to watch your credit utilization (aka the balance-to-limit ratio on credit cards).When you use a higher percentage of your credit card limits, your credit scores can drop. Paying down your credit card debt, however, might improve your credit scores over time.
3. Secured Credit Cards — Sometimes establishing new credit accounts can help improve your credit scores. But be careful not to go into new debt just because you’re trying to build credit.

There’s also a catch. It can be tough to find a lender that’s willing to do business with you when your credit scores are low.

Secured credit cards can be a good option when you’re in this situation. These accounts give you a way to build credit without going into debt. (Just be sure to pay off your full balance every month.)

Secured cards are usually easier to qualify for than other types of credit. With a secured card, you put down a deposit to open the account. Your deposit usually matches the credit limit you’re given. Most secured cards will report to all three credit bureaus (but you should verify that with the card issuer first). So, if you make all of your payments on time and pay off your balance monthly, a new secured credit card might boost your credit scores.

• Resource: Where to find secured credit cards

Remember to compare multiple offers first. This can help you find the lowest fees, best APR, etc. Here’s a list of to help you start your research.

4. Credit Builder Loan — Another way to build new credit without going into debt is to apply for a credit builder loan, like those offered by Self Financial. Credit builder loans are usually easy to qualify for even if your credit isn’t perfect. In fact, people trying to repair credit after a bankruptcy or other major credit setback might be able to qualify for this type of account.

With a credit builder loan, the bank who issues the loan holds on to your money. It’s stored in an interest-bearing account and you can’t access the funds until you make your final loan payment (usually 6-12 months later).

Once you complete your monthly payments, you’ll hopefully have several months of on-time payment history reported to the credit bureaus plus the funds from the loan. (Just be sure the lender reports to all three credit bureaus. Some don’t. Self Financial does.)

• Resource: Get a credit-builder loan from Self.

After you pay off the loan, you can use the money however you like. Maybe you’ll establish an emergency fund, pay down debt, or add money to other sinking funds. The choice is yours.

5. Credit Monitoring — Monitoring your credit reports and scores is an important part of protecting your financial health. You need to check your three reports and scores often to stay on top of your progress. It’s also wise to keep an eye out for fraud and credit mistakes regularly.

How Fast Can You Raise Your Credit Score?

Remember to be realistic when you’re trying to improve your credit. You can think of improving your credit score like a race, but it’s a marathon, not a sprint.

Significant credit improvement will take time, a good plan, and consistent follow through. Yet as long as you don’t give up, it is 100% possible to boost your credit scores over time.