If you're worried about your debt and your credit score, you're not alone. According to Experian, the average American household has $6,028 in credit card debt per quarterly earnings.
Debt is destroying people’s credit scores and their ability to get financing for essentials like a car and a home.At the same time, many people still don't understand how credit scores work, and young people are hit particularly hard thanks to additional student loan debt.
Here are some dismal highlights from America's credit landscape, according to the National Foundation for Credit Counseling’s 2019 financial literacy survey:
- Millennials have lower credit scores than previous generations
- 61% of American adults carry some form of credit card debt.
- Fundemental knowledge about credit scoring is in a decline, with only 66% of Americans answering credit score questions correctly in 2019 (versus 80% in 2012, yikes!).
- Many people still don't understand that having a good credit score is the number one factor determining their eligibility to get a loan, a house, or a job.
No matter how bad your score might be right now, you can get your finances back on track.
Raising your credit score isn't rocket science! All it takes is making a few calls and making the commitment to pay off your debts, one day at a time.
First, let's clear up what a credit score actually is.
What your credit score is and how it works
A credit score is a one-number metric that lets banks know how responsible you are with money, and how big of a risk you are should you ever request a loan (say, for a car or a house).
The credit score you hear about most in the United States is FICO, which is an algorithm that determines your score and places it on a scale between 300 and 850. Each lender has its own standard of what a "good" credit score is, but a general guide is this:
300-629: Bad credit
630-689: Fair or "average" credit
690-719: Good credit
720 and up: Excellent credit
There are three major credit reporting agencies in North America: TransUnion, Experian, and Equifax. You want good scores from all three credit agencies to maximize your chances of getting a loan from the bank. Each company prepares its own reports, so you'll need to call all three to get access to your scores — you can get your credit report once a year, and it’s free!
Alright, are you ready to get your hands dirty and fix your credit score for good? We're here to tell you how to do it.
How to fix your credit score
1. Review your credit history
One way to review your history and get on the right track is to sign up for Credit Karma, a debt management service that offers credit reports, credit trackers, and advanced reporting on your credit history. They offer a monitoring service to help you minimize the risk of fraud and errors on your account.
It's important to note that a credit report does not include your credit score.
Head to Credit Soup to get access to a free credit score, so you can get the full picture.
With a free credit report, and free credit score in hand, you've already completed the first step to repairing your bad credit score!
2. Dispute errors and outdated information
Once you get your full credit report, go through it line by line to see if there’s any outdated or incorrect information and make a note of it.
Incorrect information may include loans that you already paid off, incorrect information about how many times your credit was checked (having a lot of credit checks by lenders lowers your score), or anything else that doesn't look right.
Once you gather this information, it's time to go on the offensive. Call all of the companies and dispute every mistake. Ask for proof of any charges that are incorrect. It's common to find that credit reporting companies can't actually provide documentation or proof that the charges were valid.
Unproven credit charges should drop off your report completely once you give notice that they are wrong. Depending on your home state, there are also consumer credit protection laws in place to force these companies to help you correct any mistakes or fraud.
3. Hire professionals to do the paperwork
The next step to raising your credit score is to call in the professionals. (You can skip this part if you only find a few errors on your credit report or if you manage to get all the errors removed.)
If you've run up significant debt on multiple credit cards, consider hiring a legal service to track down documentation on your behalf, so you can dispute all the errors efficiently and completely.
Many creditors fail to keep proper records of past debts — your attorney will be able to weed out charges without supporting documentation on file with the creditor.
You'll have to wait about a month to see the effect on your score, but you'll be surprised to see how your score goes up just from fixing these errors! Seeing progress at this stage can act as huge inspiration to keep up the effort to improve your credit score.
3. Get a secured credit card
A secured card works like this: you make a deposit (let's say $500) and the bank holds that money as collateral. Your new card then has a limit of $500. You use this card like a regular credit card for a few months, making sure to pay off the card in full every month.
In effect, you're rebuilding your credit score by proving to your bank that you repay your debts. After a few months, after your score improves, you can see if you qualify for a regular unsecured credit card. The bank gives back the $500 collateral when you switch to the unsecured card.
This tactic will build your credit quickly and help you drive up your credit score at the same time.
4. Negotiate a partial repayment
On top of that, sit down with your up-to-date credit report and start calling companies with delinquent or collection items in your file.
Ask to speak to a credit representative, and follow this script: “I don't have enough money right now to pay in full, but I'll give you ‘X’ to settle it right now.” Many creditors are happy to take 50% of the amount you owe. (The standard is usually zero repayment, so 50% is a good deal.)
5. Lower your credit utilization rate
When you start paying off your credit card debt, you're lowering your credit utilization rate. Credit utilization refers to how much of your available credit you're using. For example, if you have a $1,000 limit on a card and you have an unpaid debt of $800 that keeps rolling over to the next month, you're at 80% credit utilization (800÷1000 = 0.8 x 100 = 80%).
Credit reporting agencies penalize high credit utilization and it lowers your credit score. The more you cut down your debt, the lower your credit utilization will be, and the higher your credit score!
Keeping your credit utilization at 30% or below is essential to keeping your credit score high. Once you've paid off your debt, be sure to avoid using more than 30% of your available credit in the future.
To fix your credit score, you need to:
- Take the time to fix the errors on your credit report
- Start rebuilding your credit with a secured credit card
- Keep your credit utilization low
- Steadily repay your debts
That's it! A few calls and creating a new payment plan is all you need to fix your credit score. Remember that no one expects you to pay off all your debt immediately. The important thing is to get organized and start repaying your debt, and your credit score will immediately begin to go up.
Getting serious about fixing your credit score can have a profound impact on your life and on your outlook for the future.