In April 2018, the average FICO® Score in the U.S. was 704, which is a good score. Comparatively the average VantageScore 3.0 score in 2017 was 675. And even though average credit scores are in the good or almost good range, they vary by age, state and other factors. So, there are still plenty of us with lower than desired scores and plenty of room for fixing credit issues. While fixing credit doesn’t happen overnight, there are steps we can take right now to get the process started.
The steps to fixing your credit and credit scores include getting a sense of your finances, looking for any errors and pinpointing problem areas that you need to address such as overspending. When you break it down, the five steps to fixing credit issues are:
- Know your credit score and get copies of your credit reports.
- Fix any errors on your credit reports.
- Maintain healthy credit accounts and start building a positive credit historyto help reach credit goals.
- Control your credit utilization and lower high utilization if needed.
- Keep an eye on the age of your credit.
It won’t be super easy. And it won’t be as fun as using your credit, but the relief you’ll feel when you can take out new credit when you need it will be well worth the time and effort you put into fixing credit issues.
1. Know Your Credit Score and Get Copies of Your Credit Reports
The first thing you want to do when fixing your credit is to find out your credit score and get copies of your credit reports.
Your credit score is separate from your credit reports. And your reports don’t include your scores. But, thanks to the Fair Credit Reporting Act, you can get free copies of your credit reports from the three main credit bureaus—Experian, Equifax and TransUnion—once a year. You can access all of your free reports thru AnnualCreditReport.com. Or get your reports directly from Experian, Equifax and TransUnion.
You want your credit reports from each of the major credit reporting agencies, because each one can contain different information that impacts your scores. You rarely know ahead of time which agency’s report a lender will pull, so it’s important to make sure each report is accurate and that you’ve corrected any issues.
What You’ll See on Your Credit Reports
Your reports contain basic details about you—your name, birth date, address, etc. It’s important to review this information to make sure it’s accurate. It’s okay if your past addresses are listed.
Reports also show any financial legal issues you have, such as a bankruptcy, liens, judgments or wage garnishment. If one of these issues is bringing your credit scores down, take comfort in knowing these negative items eventually age off your reports.
Beyond that is creditor information, which makes up most of your reports. This includes different accounts you have—loans, credit cards, etc.—and their status (open/closed, in collection), balances, credit limits and payment details. It can also include dates of missed payments or late payments and when the accounts were sent to collections. It’s this information that’s used to determine your credit scores, which are broken down into five major areas:
- Payment history, which is 35% of your FICO score, and includes your history of repaying account debts (VantageScore doesn’t reveal the percentages it uses.)
- Credit utilization, which is 30% of your score, and shows how much debt you carry in relation to your credit limit
- Length of credit history, or credit age which is 15% of your score, and shows how long you’ve had active credit accounts
- Types of credit, which is 10% of your score, and shows the variety of your accounts
- Credit inquiries, which is 10% of your score, and shows the number of inquiries made to your credit profile
Now that you understand what your reports cover and what goes into calculating your credit, the next step in fixing credit issues is correcting any errors you find on your credit reports.
2. Fix Any Errors on Your Credit Reports
Once you’re looked at your credit reports, you want to fix any errors you find. For most people, the process of fixing errors on credit reports is known as credit repair. Credit repair is something you can do on your own.
If you do find errors, you won’t be alone. From October 2016 to September 2017, the Consumer Financial Protection Bureau (CFPB) fielded 85,000 complaints about credit report errors. Fortunately, federal law lets you dispute credit report errors with the credit bureau that’s reporting the error.
When contacting the agencies, use these basic guidelines to help navigate the process.
- Dispute a mistake with each credit bureau that reports the error. Just because the same mistake appears on all three credit reports doesn’t mean disputing it with one of the bureaus will fix the error at the other bureaus.
- Dispute errors for different accounts separately. It’s not uncommon to find multiple errors for different credit accounts on a credit report. And you want to dispute each account reporting an error separately. However, if you see multiple mistakes on the same account, you can group all those mistakes into a single dispute.
- Be thorough in your dispute. See How to Write a Credit Dispute Letter for insight.
- Seek help if you want it. You can dispute credit report errors yourself, but for some people, the process is stressful. If you feel overwhelmed, you can hire a credit repair company or law firm to help. Note that a professional credit repair firm will charge a fee for its services. A good credit repair company will never promise a “300-point jump in your scores!” In fact, that’s illegal. Instead, the company should be upfront about what they can do and will take payment only after they’ve helped resolve your situation.
If you have errors, especially inaccurate negative information, on your credit reports, you can see changes to your credit scores fairly quickly. Credit reporting agencies have to respond to disputes within 30 days, although some can take 45 days. And if the credit reporting agency sides with you, it must remove the mistake immediately. In a 2012 Federal Trade Commission study on credit report accuracy, four out of five people who disputed an error on their credit reports had a modification made to their reports.
Not all credit issues though are about errors on your credit reports. So, the next step—whether you have to dispute errors or not—is to maintain healthy credit accounts.
3. Maintain Healthy Credit Accounts
Your payment history is the most important factor in your FICO credit score and accounts for 35% of most scores. VantageScore doesn’t provide percentages, but the percentages used are likely similar to FICO’s. And even just one late payment can drop your scores significantly. Having a good payment history is critical to maintaining healthy credit accounts.
Fixing inaccurate negative information on your account is fairly easy. But, if you have accurate negative information on your credit reports, it can take a long time for it to age off.
- Late payments: 7 years from the late payment date
- Foreclosures: 7 years
- Collection accounts: 7 years and 180 days from the date of delinquency on the original debt
- Short sales: 7 years
- Bankruptcies: 10 years from the filing date; 7 years for Chapter 13 cases
- Repossessions: 7 years
- Judgments: 7 years for paid judgments, longer for unpaid judgments
- Tax liens: 7 years once paid
- Charge-offs: 7 years from the date the account was charged off
To avoid the wait for a better credit score, maintain healthy accounts by paying debt off on time whenever possible.
More Factors for Building and Maintaining Healthy Accounts
The mix of your credit accounts makes up 10% of most credit scores and is another critical part of showing you can maintain healthy credit accounts. Your mix of accounts shows creditors and the credit agencies that you’re able to handle different types of credit. The two main types are:
- Installment accounts, such as mortgages, car loans and student loans
- Revolving accounts, including credit cards and lines of credit
Creditors want to see you can handle both types of credit responsibly. If you’ve only had credit cards in the past, a car loan or a mortgage can improve your credit score. It’s however rarely a good idea to take out a loan just to build credit.
Another factor in proving you can maintain healthy credit accounts is your history of applying for credit. This accounts for 10% of most credit scores. If you apply for several credit accounts in a short period of time, it can hurt your credit.
When you apply for credit, it results in a hard credit inquiry on your credit report. And any hard inquiry into your credit slightly dings your scores. As hard inquires fade into the past, they have less impact. A year is generally when a hard inquiry begins to stop hurting your credit scores. Bottom line: Apply for new credit only when needed. Don’t be lulled by the offer of a discount to open a new charge card at virtually every store you shop at.
When you’re ready to shop for new credit, such as a mortgage or auto loan, a good practice is to rate shop during a 14- to 45-day window, depending on the scoring model. Most credit scoring models will group inquiries by type in that time frame and not see them as unique hard inquiries.
4. Examine Your Credit Utilization
Credit utilization is the amount of revolving debt you have relative to your credit limits. More specifically, it’s your available revolving credit, which is your available credit limit, compared to your total credit debt or the amount you’ve actually charged on your cards or credit lines. It’s also the second most critical factor in how your credit scores are calculated
Say you have a single credit card or home equity line of credit with a $5,000 credit limit—this is your revolving credit. If you have a balance on that card or credit line of $1,100, that is your total credit debt. In this case, your credit utilization is 22%.
To protect your score, it’s best to keep your credit utilization below 30% of your credit limits. A 10% credit utilization amount is ideal. An amount of 30% or less shows creditors that you can manage your available credit responsibly without maxing out your credit limits.
Hint: If you pay a credit card off on time regularly, your issuer will likely see you as a good credit risk and increase your credit limit. Don’t however start charging more. Simply charge the same basic amount. Doing so will keep your utilization lower! Say you started with a $2,000 limit and charged just $200 a month, you had a 10% utilization. If your limit is raised to $4,000 and you continue to charge just $200 a month, your utilization is now just 5%.
If you do go over the 30% mark, you can most likely undo any small decrease in your credit scores by paying off those balances and getting your overall utilization back to 30% or less as quickly as possible. It’s best, if possible though, to keep your utilization to the 30% cap at all times.
5. Keep an Eye on the Age of Your Credit
The age of your credit accounts is another factor in your credit standing. It accounts for roughly 15% of most credit scores. It’s also a part of your credit utilization, which makes some credit better than no credit.
The age of your credit is calculated by looking at the age of your oldest account and the average age of all your accounts. If credit age is hurting your scores, you can’t really do much about it. You do, however, want to avoid closing your oldest accounts if possible.
If you don’t have any credit history, consider opening a credit card that you don’t use or use very sparingly. The card will at least be reported on your credit history and build up a history of its own. One note: It may be best to have a card that you use a little bit and pay off in full each month. Why? This will prevent the issuer from closing the card due to inactivity. When you apply for a new card, you can also find out about the issuers policies on closing cards for inactivity.
Rebuilding Credit May Be the Only Way of Fixing Credit
If you’ve made some missteps and have poor credit, the best way of fixing credit is sometimes to start rebuilding it. If that’s your situation, here are some tips to consider as you fix your credit:
- Stay mindful of the five steps for fixing credit, because they also help you maintain good credit as you rebuild your credit.
- Pay down credit card balances if your utilization is too high and refrain from making new purchases. In fact, you may want to put your plastic on ice as long as you aren’t risking the issuer closing the account.
- Refrain from closing old credit card accounts, since it can affect your credit utilization and make it harder to build a solid credit history.
- Even if you’re denied one kind of credit, that doesn’t mean you’re shut out from borrowing entirely. If your payment history, credit utilization or a mix of accounts are hurting your scores, opening new credit may help you rebuild credit faster. There are credit cards designed to help, called secured credit cards.
- If you’re worried about taking out a credit card or can’t qualify for one, consider a credit-builder loan.
- Consider paying outstanding collection accounts. Some newer credit scoring models ignore paid collections entirely.
Fixing Credit with a Secured Credit Card
If you have a poor credit history or a lack of credit history, a secured credit card may help you repair your credit and raise your credit scores. These require a deposit that generally serves as your credit limit. If you don’t pay your bills, the card issuer can withdraw the deposit. If you open one of these cards, it’s important to make on-time payments and keep an eye on your credit utilization.
Depending on your situation, a secured credit card can help you start fixing your credit in as little as six months. However, it may take longer to see a marked improvement in some cases. If your credit history is limited and you have no credit, then a secured card may be your best route, because you have no negative information to start with.
The secured credit card is a way to build and establish credit to obtain higher credit scores. If you haven’t been able to get approved for a traditional credit card, you’re still likely to get approved for a secured credit card, because there’s less risk for the lender. The card issuer will report your ability to pay the credit card on time and how you manage and use the balance to the credit bureaus.
Additionally, the security deposit you use to obtain the card is used if you default on your payment. Using the security deposit means that, even if you default, the card is paid because it’s secured by your funds. As such, the account won’t in collections due to nonpayment. However, this isn’t the case if the balance on which you default is higher than the amount of your security deposit.
Why Fixing Your Credit Is Important
There are many reasons to start on the path to credit repair. The biggest reason is that credit affects you every day. It affects the interest rates you pay on credit cards and loans, including mortgages, and can result in higher security deposits for rentals. It can also affect what you pay for insurance rates and what credit limits you qualify for. Good credit can also mean financial freedom where you don’t have to depend on cosigners to help you make purchases and secure loans.
So, if you need to fix your credit—or want to maintain your existing credit—use the five steps outlined here. And, no matter what your credit is today, don’t give up! If you build good habits over time, fixing your credit will be automatic, ongoing and not even needed because you’ll maintain good scores all the time.