If you’re planning to buy a house, take out a loan, or apply for certain jobs, you already know how important your credit score is. Your credit score helps you get access to the money you need by showing creditors that you are a trustworthy borrower. If you improve your credit score to above a certain threshold, you’re more likely to get approved for a loan with a lower interest rate and better terms.
Of course, having a low credit score could make it harder for you to get approved for a loan—and even if you do get approved, you could be faced with high interest rates. The good news is that there are ways to recover from bad credit; it just takes a little effort. Here are four tips that could help you improve your credit score.
1. Check your credit score and your credit history
“More and more credit card issuers are giving their customers access to their FICO scores. It’s a very good idea to use these tools periodically in order to know where your credit score stands,” says Michael Micheletti, Head of Corporate Communications for Freedom Financial Network. “If you notice your score dropping, be sure to check your credit report to figure out the reasons why and dispute those reasons if they are inaccurate.”
Getting copies of all three of your credit reports at annualcreditreport.com is a great place to start. You can access these reports for free once a year, per federal mandate (avoid other services offering a free credit report, as they may be scams). If you find any errors or inaccuracies on these reports, reach out to the lender and credit reporting agency to have the information corrected.
When you look at your credit reports, you will also see “reason codes,” which help explain why you are scoring the way you are. Understanding why your score isn’t higher than you would like by looking up the reason code can give you clues on how to improve your credit score.
2. Get current and stay current
Once that’s done, it’s crucial to remain in good standing with your creditors. Freddie Huynh, VP of Credit Risk for Freedom Financial Network, was the architect of FICO Score 8 and FICO Score 9. He explains the importance of being current on your payments:
“How someone pays their bills is the most influential component of a FICO score. In fact, it accounts for 35 percent of the FICO score! It’s important to note that the score can penalize any evidence of late payments, but it can also reward evidence of good payment history as well.”
“I often say that improving your credit score is like losing weight. There’s no quick fix and it takes time and discipline to lose weight. However, if you lay off the decadent desserts and combine that with a constant dedication to eating healthy and regular exercise, you will lose weight. The way you improve your credit score is similar.”
How someone pays their bills accounts for 35% of their FICO Score.
3. Re-establish credit
For consumers who have been through the proverbial financial ringer, they’ll need to re-establish credit. This should only be done when they’ve gotten their finances in order. Re-establishing your credit is a challenging and slow process if you’ve had a history of very bad credit. However, Freedom Debt Relief VP of Client Enrollment Kevin Gallegos has advice for people with poor credit who are looking to open an account:
“If you’re having trouble getting approved for a card, seek out a secured credit card. These cards work just like any other credit card, but you pay the creditor up front to secure the credit they are extending to you. Continue to use this card and pay back the amount you owe each month to improve your credit score.”
4. Lower your credit card credit utilization
If you have established credit and pay on time but your score isn’t as high as you would like, you may want to check your credit card utilization. Credit card utilization is based on the total amount of credit card debt you have versus the total credit lines you’ve been extended. Though all sorts of debt is influential to your credit score, credit card utilization is particularly influential. Lowering your credit card utilization to below 30 percent (or lower) can help you improve your credit score.
“Keeping your credit utilization at a manageable level isn’t just good for your credit score—it’s good for your overall financial health,” says Sean Fox,President and CRO of Freedom Debt Relief. “As your credit utilization climbs, your score can drop and your minimum payments increase. When you fall into this pattern, it’s easy for your debt to get out of control.”
Lastly, if you find that your credit utilization is getting too high, it might be time to consolidate your debt or start paying it down more aggressively. If you do take out a debt consolidation loan, just make sure you don’t repeat past mistakes and let your unsecured debt spiral out of control again.
5. Don’t close unused credit cards
If you’re paying down your credit cards and simplifying your finances, you may be tempted to close out those extra cards you no longer use. While it may be satisfying to do so, it also could hurt your credit score. When you close unused accounts, you’re actually raising your credit utilization ratio, since you still owe the same amount but have a lower credit limit. Having been approved for credit that you’re not using will not only help your credit score but will also show that you’re creditworthy.
Go ahead and cut up those cards you no longer use, which may provide the peace of mind you’re craving, but don’t cancel them unless they incur annual fees.
Improving your credit can be a challenge. There’s no quick fix, but with hard work and consistency you could get your credit back on track.
Improve your credit score for better financial health
Learning how to deal with debt and planning for your future doesn’t need to be hard, especially if you take steps to improve your credit score. We’ve developed a helpful guide that will help you find the tools you need to realize a brighter financial future. Get started by downloading our free guide today.
Learn More
- Does Unemployment Affect Your Credit Score? (Freedom Debt Relief)
- 5 Credit Score Factors You Should Know (Freedom Debt Relief)
- What’s the Difference Between a Credit Score and a Credit Report (Freedom Debt Relief)
