7 steps to take if you have bad credit | The motley fool

Man in suit stands with arms crossed with pictures that read BAD CREDIT and GOOD CREDIT on either side of him.

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Bad credit is one of the most frustrating financial problems because it affects your life in so many ways. You have to pay higher interest rates when you borrow money. There may be times when you are approved for credit cards and loans, and even affect apartment applications. In many states, auto insurance rates are also higher for consumers with lower credit scores.

If you have bad credit, you probably know you need to improve it. The hardest part is figuring out how. To help you with that, here are some simple steps you can take to start your creditworthiness

1. Use a credit score tool to check your credit

The only way to know if your credit score is improving is to keep an eye on it. Fortunately, there are quite a few free ways to get your credit scoreThese services typically provide an updated credit score every month. They also often give you tips to improve your score based on your credit profile.

View your credit report from any credit bureau

Your score is based on the information in your credit report. If anything in there is inaccurate, it could hurt your score. The best way to avoid this is to check your credit reports regularly.

There are three consumers credit bureaus who have compiled credit reports: Equifax, Experian and TransUnion. Sometimes there are differences in the information everyone has for you, so be sure to get your credit reports from each credit bureau.

You can get your credit reports online at AnnualCreditReport.comYou are normally legally entitled to one free credit report from each credit bureau per year, but the three bureaus offer free weekly credit reports through April 2021 due to the COVID-19 pandemic.

3. Disputes inaccurate items in your credit file

Removing negative items from your credit file can lead to a major rise in your credit score. Common incorrect items include:

  • Accounts incorrectly reported as late or past due
  • Accounts with wrong balance or wrong credit limit
  • Accounts of another person with the same or similar name
  • The same debt is mentioned several times
  • Fraudulent accounts opened because of identity theft

If you find inaccuracies in your credit report, dispute them. This is easy to do online. Here are the links to disputes with each credit bureau:

4. Keep track of any overdue bills

Your payment history is the biggest factor you are used to determine your credit scoreLate payments can drastically lower your score, and the longer you go without paying, the more damage it will do. Keep in mind that a payment must be at least 30 days late before the creditor can report it as overdue to the credit bureaus.

If you have overdue bills, it’s important to pay on them as soon as possible. This will prevent the account from becoming even more overdue and your credit will be further affected. If you are unable to make your payment, please contact the creditor to see if you can pay a reduced amount.

Pay credit card balances

Another part of your credit score is your credit utilization ratio, that is the available credit you use. Here’s a quick example. Let’s say you have a credit card with a credit limit of $ 10,000. If your balance is $ 8,000, your credit utilization would be 80%.

High credit utilization is bad for your creditworthiness. The higher it is, the more your credit score will drop. Good credit usage to aim for is 20% or less. If you have $ 10,000 in lines of credit from all of your credit cards, you would like to keep your total balance under $ 2,000 at all times.

That may seem like a challenging goal right now. Remember that every bit of progress helps. As you pay off credit card balances, you will see your credit score increase.

6. Use a credit card regularly – and pay it on time

For a good credit score, you need to build a strong payment history. The most effective way to do that is to use a credit card regularly and pay the bill on time. Make sure to pay in full so you don’t have to pay interest.

The reason this works is simple. When you use your credit card, you borrow money. If you pay on time, a positive item will be listed on your credit file. Each month you do this, you will build a longer history of on-time payments. If you don’t qualify for a regular credit card, a well secured credit card might be an option.

7. Apply for new accounts sparingly

While you are working on your credit, it is best to limit credit card and loan applications. There are two reasons for this:

  • Each time you apply for a new credit, the lender will run one difficult credit researchThis has a minor negative impact on your credit score.
  • The average age of your credit accounts affects your creditworthiness. When you open a new account, that average age decreases, which can also hurt your credit score.

You don’t have to avoid credit applications altogether, but you do have to be selective. For example, if you already have a credit card, there is no point in opening another until you improve your credit score.

Your roadmap to more credit

Once you know the correct steps, there is nothing special about increasing your credit score. That doesn’t mean it’s easy – some of the steps above require hard work and take time. But if you’re willing to do your best, you’ll be rewarded with a much better credit score.

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