How To Fix A Bad Credit Score

Your credit score is used to determine your riskiness to a lender. Having a low credit score can result in you getting a higher APR on any debt, less offers, and cost you significant money. If you have a bad credit score, how can you fix it and make it higher?

The threshold for ‘excellent’ credit is 781. If your credit score is below excellent, here are 12 steps you can take to improve your bad credit score. (And if you have exceptional credit, you can still use these to maintain and further improve it)

1. Get Your Credit Report
2. Check Your Credit Report For Errors
3. Dispute Any Errors You Find
4. Pay Late & Past-Due Account Balances
5. Increase Credit Limits
6. Decrease Credit Utilization
7. Move High-Interest Balances To No-Interest Accounts
8. Pay Off Balances On High-Interest Accounts, Starting With Newest Accounts
9. Diversify Your Credit Mix
10. Retain Old Accounts To Improve Credit History Age
11. Don’t Take Out Too Much New Credit
12. Pay Balances On Time

If you follow these 12 steps, you will see a huge improvement in your credit score.

What Is A Credit Score?

Credit scores are single numbers used by lenders when deciding to loan you money. The higher your score, the more likely you get approved for debt and the lower APR you get charged.

Credit scores are important as they impact your real financial situation. Not only will poor credit lead to higher costs for you, but good credit allows you to get top-tier offers from lenders. If you want a high-rewarding credit card, you want good credit.

Credit scores range from 300 to 850 with lower credit scores being poor and higher ones exceptional. The credit score ranges are:

• Exceptional Credit: 800 to 850
• Very Good Credit: 740 to 799
• Good Credit: 670 to 739
• Fair Credit: 580 to 669
• Poor Credit: 300 to 579

Credit scores are based on the Fair Isaac Corporation (FICO) scoring model.

How Is Your Credit Score Calculated?

There are 5 factors that go into calculating your credit score, each with a different weight:

• 35% Payment History
• 30% Credit Utilization
• 15% Average Credit Age & Established Credit History
• 10% Credit Mix & Number of Accounts in Use
• 10% Number and recency of hard credit Inquiries

The easiest factors to immediately impact are your payment history and credit utilization. Since these 2 factors make up nearly 2/3rds of your total credit score, you can have a large improvement in your score in a short-time frame. (Read all about credit scores here)

How To Improve Your Credit Score

There are 12 steps to improve your credit score. The biggest opportunities for a high credit score are from paying on time and decreasing your utilization ratio.

However, each of the 12 items on this list are beneficial and many are important actions you should be doing even if you have good credit.

1) Get Your Credit Report

You can’t fix what you don’t know.

A crucial step to improving your credit is getting a full picture of your current credit situation. Therefore, it is important to view your credit report often to ensure it is accurate and there is no fraudulent activity.

Many companies provide free credit scores to you. These include credit cards as well as third party services like credit karma.

However, these services don’t give a full picture. Luckily, all 3 major credit bureaus are required by Federal law to provide one free full credit report per year upon request.

You can request your free annual credit report online from the Annual Credit Report Request Service. Additionally you can make the request by phone or mail.

Each of the 3 credit bureaus (Experian, Equifax, and TransUnion) will have a full credit report. You can get all 3 at the same time, or pull each one at a different time. This means you could get one full credit report for free every 4 months if you rotate through.

When reviewing your report, you will see credit history of all debt. This will include credit cards, loans, accounts sent to collection, and legal actions (bankruptcies & foreclosures).

2) Check Your Credit Report For Errors

The first thing to look for is any errors on your credit report. According to the Federal Trade Commission (FTC), 25% of credit reports were found to have an error.

Not all the errors negatively impacted scores, but you want to review your full report for:

1. Wrong Personal Information (includes incorrect information and spelling)
2. Missing Accounts that you have open
3. Accounts that don’t belong to you
4. Duplicate accounts
5. Incorrect public records like foreclosures or bankruptcy
6. Inaccurate accounts (like saying an active account is closed)
7. Delinquencies and derogatory marks
8. “Closed by grantor” accounts (accounts the lender closed)
9. Incorrect credit inquiries
10. Outright fraud or wrong credit information

If you find any errors, you want to contact the credit bureau. This is called a 609 letter, as it is section 609 of the Fair Credit Reporting Act (FCRA) that gives you the right to request and challenge your credit score.

If you find an error, you may see a significant improve in your credit score just from having it corrected.

Even if you have a good credit score, you should be checking your full credit report 1-2 times a year. This is a best practice to catch any new errors or watch for fraud.

3) Dispute Any Errors You Find

Fixing mistakes on your credit report is often the quickest way to improve a credit score if you are one of the 1-in-4 people with an error. You can request for a correction online, by phone, or mail.

Best of all, credit bureaus are legally required to try and resolve errors when you report them. And it is free to file your dispute with all the bureaus.

When you report an error, contact the correct credit bureau where you received your report. Have documentation ready to prove the mistake such as legal documents or account statements.

You can reach each of the 3 major credit bureaus here:

If the mistake is with an account, you should contact the company that the account is with and let them know of the error. Lenders can often fix an inaccuracy on their end. When a lender makes a correction it can take 30 to 45 days to be reflected on your report. However, it will flow to all 3 reports and will avoid any continued reporting of incorrect data.

4) Pay Late & Past-Due Account Balances

Now that you have viewed and fixed all the errors on you credit report, you should pay overdue balances. Payment history is the heaviest weighted factor on your credit score. Therefore, getting all accounts current will have a big positive impact.

You have a 30 day grace period between payment due date and when it is considered late. But once the 30 days past, lenders and creditors can report the late payment to the credit bureaus.

The longer your account is past-due, the worse the impact to your credit score. And if your account gets turned over to a collection agency, that can be noted on your credit report. Having an account in collections often has an enormous negative impact to your score.

Some lenders will send your account to collections after 30 days and other may wait till 90-days past-due or more. If you are having a hard time making payments, contacting the lender to discuss options may help prevent your account going to collections.

Charge-offs, Collections, and ‘Pay-For-Delete’

Collections is when an account gets sold to a third-party to collect the funds. Collection agencies buy your debt from the lender for less than the full amount and make money when they collect from you. There are strict rules around what they can and can’t do. If you are dealing with a collection agency, read the Fair Debt Collection Practices Act (FDCPA) to know your rights.

When a debt is in collections, you can typically work with the agency and pay off the debt for less than the full amount. Since collection agencies buy your debt for fractions of the balance, they will still make money even if you don’t pay the full amount.

‘Pay-for-delete’ is an agreement between you and the collection agency to remove a collection account from your credit score. You must agree to pay off the negotiated amount. You can then send a pay-for-delete letter to your original creditor asking them to take the account out of collections on your score.

Lastly, a charge-off is when a payment is more than 6 months (180 days) past due. At this point, most creditors will mark the account as uncollectible and report the charge-off to the credit bureau. In charge-off, you no longer can make minimum payments and your account gets canceled. You can only pay the outstanding balance off in full and the account can continue to accrue interest.

Having accounts in collections and being charged off are major black marks on your credit report. And these can stay on your report for up to 7 years meaning they will have a long lasting impact.

Even worse, having a collection or charge-off can limit your ability to open new accounts to rebuild your payment history.

In short, you want to avoid collections and charge-offs as much as possible.

5) Increase Credit Limits

When you have a credit card, you will be given a credit limit. The credit limit is the maximum balance you can have on the card. Depending on your creditworthiness and the credit card, your limit can be as low as a few hundred dollars or $10,000s.

When you have an established positive history with a lender and/or your credit score improves, you may get automatic credit limit increases. This has no negative impact on you. On the contrary, it allows you to potentially spend more on the card. Or if you don’t change your spending habits, a higher limit can increase your credit score by lowering your credit utilization. (See #6 for more details on credit utilization).

You can also ask your credit card companies for a credit limit increases. Many credit cards make this easy to do online. This can be a quick way to improve your score.

6) Decrease Credit Utilization

Credit utilization ratio is a measure of how much outstanding debt you have vs. your total available credit. The lower the ratio, the more positive it is on your score.

Since credit utilization is a ratio, you can lower the number by decreasing your outstanding balances. Or you can decrease credit utilization by increasing your total available credit.

If you have $2,000 balance across all your credit cards and $10,000 of available credit, your credit utilization would be 20%. ($2,000 / $10,000 = 20%). But if you get a credit limit increase to $20,000, then your ratio is only 10%. ($2,000 / $20,000 = 10%).

It is recommended that the ideal utilization ratio is under 10%. However, as long as your ratio is below 30% it shouldn’t impact your score. If your credit utilization is over 30% it can start to have a negative impact.

Asking for a credit limit increase doesn’t count as a hard data pull or a new account. Even if the creditor declines your request, you have no negative impact to your score.

If you have had credit cards for a while, requesting a credit limit increase is a low-risk and easy way to improve your score. This is assuming you don’t increase your credit card usage and increase your balances.

[Professor B.T. Effer Note – Opening a new credit card also increases your available credit. However, when you open a new card you have two negative impacts. First, you will need to have a hard data pull which has a small near-term negative impact. Second, you will lower your credit age which makes up 10% of your credit score.

Therefore, it is better to increase your credit limits on existing cards first.]

7) Move High-Interest Balances To No-Interest Accounts

If you have balances on credit cards that are accruing interest, you need to pay those off. For one, most credit cards have extremely high interest rates (17% to 25%+). They are very expensive debt to have.

It is commonly recommended to transfer your balance to a new card with a promotional 0% APR. However, nearly all cards have a balance transfer fee and charge 3-5% upfront. So if you transfer a $1,000 balance, you will pay $30-50 immediately. The new card will have a $1,030 to $1,050 balance to pay off.

A better way, is to open a new card with 0% promotional APR and put your normal spending on it. Then use the money you would have spent on the purchases to pay the balance on the old card.

For example, if card A has a $1,000 balance that is accruing interest. You open up card B. But instead of a balance transfer, you put $1,000 of your everyday spending on card B. Since you have an extra $1,000 in your checking account, you immediately pay off the balance on card A. This works because as long as you pay the minimum payment on the credit card, you keep the 0% APR and there is no interest.

You have avoided the $50 balance transfer fee. Additionally, most new cards come with promo rewards like “get an extra $200 in rewards when you spend $500 in the first 3 months”. Furthermore, you earn the 1-2%+ regular rewards from purchases. (Balance transfers don’t earn rewards.)

Let’s assume you get 2% cashback and a $200 promo reward. That means you ‘made’ $220 with your $1,000 of spending.

Instead of paying a $50 transfer fee to credit card B, you earned $220 in rewards from credit card B. That is a net gain to you of $270. And you accomplished the same task of moving the $1,000 balance from card A to card B.

Since you aren’t paying 20% APR on card B, you can pay off the $1,000 balance quicker. And, you can use the $220 in rewards towards your balance. It is a win-win-win for you.

[Professor B.T. Effer Note – the 0% promotional APR still requires you make at least the minimum payments. Otherwise, you forfeit the 0% APR and likely owe back interest on your balance. Whether you do a balance transfer or use our hack above, make sure you are always paying at least the minimum payments.]

8) Pay Off Balances On High-Interest Accounts, Starting With Newest Accounts

If you have multiple balances on multiple cards accruing interest, you want to pay off the high-interest cards first. By starting with the highest APR cards, you will ultimately pay the least amount of money.

This is called the avalanche method. The alternative is the snowball method where you pay the lowest balance card first. Once the lowest balance is paid off, you apply those payments to the next lowest balance. (Under both methods, you make the minimum payments on all other cards).

The snowball method has gained popularity, but overall you will pay more interest this way.

We strongly encourage the avalanche method. If you are being intentional about paying off your debt, the avalanche is the least expensive approach. Why pay more and pay for a longer period of time when you don’t have to?

9) Diversify Your Credit Mix

Credit mix get a small weighting (10%) in your credit score calculation. You shouldn’t open a new debt just to diversify your credit mix. However, if you have multiple loan types it can be a small positive to your credit score.

Lenders like to see a diversified mix. There are 2 types of credit:

• Revolving Credit: Products where you make different payments based on how much you spend. Credit cards and home equity lines of credit (HELOC) are revolving lines.
• Installment Loans: Products where you make a fixed payment over a pre-determined timeline. Mortgages, student loans, and auto loans are considered installment loans.

And remember, if you open a new account it can have a small negative impact. So don’t open new accounts just to diversify your credit mix.

10) Retain Old Accounts To Improve Credit History Age

Your credit history and age of your accounts impact your credit score. Lenders want to see a long credit history. Also, if you have a lot of new accounts, lenders may view it as you being in duress and opening accounts to pay for living.

Therefore, if you have old accounts, you want to retain them. This helps your ‘average credit age’. If you don’t use an old account, it may make sense to put 1 infrequent purchase or a single re-occurring purchase on it. This will keep it open and active and help your credit score.

11) Don’t Take Out Too Much New Credit

When you apply for credit, the lender will run a hard inquiry. Hard inquiries are also know as credit checks. Too many credit checks in a short window of time (a few months) will negatively impact your credit score. It is seen as you being in financial hardship and needing to stretch you credit.

It is important to be mindful how often you apply for new credit. A good rule of thumb is to limit new accounts to 1 every 6 months.

However, multiple credit checks for the same kind of loan in a very short time are often considered a single inquiry. For instance, if you are shopping around for a new mortgage or car loan and try different lenders. You should just make sure you group it to no more than a week or 2.

12) Pay Balances On Time

Last but not least, you need to pay balances on time. Paying off what you owe in a timely manner is the biggest positive impact to your credit score.

If possible, having automatic payments set up is a great way to ensure you are always paying on time. Although, make sure you don’t overdraw your checking account and rack up bank fees.

Even if you can’t pay the full balance, or if you are paying down multiple balances, make sure you make at least the minimum payment. Paying something is much better than paying nothing and having an account be considered past-due or get sent to collections.

How Long Does It Take To Fix Your Credit Score?

It can take several months to fix a credit score depending on how bad your score is. Even correcting inaccurate items might take a couple months after you report it.

Remember, you didn’t build a low credit score overnight and you can’t fix one over night.

However, since better credit leads to better loan approval rates and lower interest on loans, a good credit score is worth the effort.

Should You Use a Credit Repair Service?

There are credit repair services that will help you fix your credit for a fee. We discourage the hiring of these services.

They will basically do some of the steps listed in this post. It can be time intensive to fix your credit score on your own. But these services typically cost $100s to $1,000s. Additionally, by doing the process on your own, you will learn a great deal about financials and credit.

The Final Word – Fixing Your Credit Score

Fixing a credit score can be a long process. However, it is one that is worth is. Getting better approval rates and lower APRs on loans can be immensely helpful.

You now have the 12 steps to fix your credit score. Follow these steps and you will have an excellent credit score before you know it.

Frequently Asked Questions (FAQs)