There are many mistakes you can quickly recover from in life, but messing up your credit score is unfortunately not one of them. The good news is that you can improve even a poor credit score into the 700s or higher – it simply takes time and some dedication. Nobody can force you to pay attention to your credit, so to achieve a good score you have to truly want it and focus on making it happen.
I created this post because I’ve been in that exact situation. For a long time, I didn’t pay attention to my credit and had a score in the low 500s. It took me a few years to get above 700, but it was worth it after finally being able to buy a house. My recommendations here can help you to rebuild your credit to help you achieve your goals too!
Credit Monitoring Services
One of the biggest recommendations that I can give you is to sign up for a credit monitoring service. Sometimes you can get these for free, but they are still worth $20-$25 per month if you’re serious about being successful raising your score. The major credit reporting agencies, like Experian, offer these monitoring services.
Being able to utilize one of these services is important for a couple of reasons. First, to get a higher credit score you have to be aware of what is on your report. Once you’re aware of your credit situation, you can begin to take steps to improve it since each situation is different. You don’t need a debt consolidation company or an expensive consolidation service – you just need to know your own situation.
See the various accounts that show up on your report. Notice what is being reported and what isn’t. You may have paid your rent on time every month for years and never missed a payment to your internet or cell phone provider, but you won’t find your landlord or any of your utilities on your credit reports unless they’re accounts in collections.
In general, credit cards, installment loans, car loans and mortgages will be the only items that do get reported when you pay on time and everything else may be reported when your account goes unpaid. Unless something shows up on your report, it can’t help or harm your score, so it’s very important to focus on the items that matter.
Be careful using credit score boosting on these services though. Raising your score with a single agency won’t actually help you since most loan applications will toss out the highest and lowest of the scores from the 3 main agencies. If you’re trying to get a mortgage, anything self-reported for a boost service will show up as a debt that goes into your mortgage calculations, so you can inadvertently make it harder to get a mortgage this way by inflating your debit to income ratio.
Open New Credit to Build Credit
If you do not have any open lines of credit, a mortgage or even a car loan, you won’t actually be able to do much to improve your score. In a way, the bad news is that you have to utilize credit to really get a good score, so that is why you need to be serious and responsible about this task otherwise you can do more harm than good. Do not go overboard with opening credit cards! It can be a good idea to have three cards, but they can get out of hand if you try to get too many.
If you are in a situation where your credit is so poor that you can’t even get a credit card, the best solution is usually a secured credit card. If you have a checking account, you may be able to get one of these cards through your bank. The concept is simple – just deposit funds and that amount becomes your credit limit. Pay your bill on time each month and after a set amount of time, you get your deposit back. Even a simple $500 limit secured card can be very useful to boost your score, and it can sometimes be the only real way to get started if you already have damaged credit.
No matter what kind of credit card you have or decide to open in the future, try to remember that your long-term goal is to have a small handful of accounts that have been open for a long time and have a good payment record. The actual limit on the card doesn’t really matter for now, but you need to pay attention to annual fees. Personally, I avoid any credit cards with an annual fee because I want to retain them for a long time and that means stuck paying fees over and over again.
The best and fastest way to improve your credit score is to have a variety of credit. Even if you can’t have all types immediately, make it your goal to eventually have all three – revolving credit, car loan, mortgage. I started paying attention to my score when I was interested in buying a house, but it was in the low 500s then. It wasn’t possible to get a mortgage, but I was able to get a car loan and a secured credit card. Even though the car financing had a terrible interest rate, I still appreciated being able to get the loan and what it could do for my credit, so I didn’t regret paying the additional interest.
This is more important when you’re building your credit or trying to recover from a bad score, but it will always be a factor that can hold your score back if you don’t have a variety of types of credit. Pay attention to inactive credit cards or loan terms because closed accounts can hurt your score and may decrease your credit variety at the same time.
The most common thing people know about credit is paying your bill on-time, but getting a good mark on your credit report for an on-time payment isn’t entirely clear. You can actually have a perfect payment history and still make late payments all the time! The key to paying “on time” is actually to avoid being 30 days late on your payment anywhere that reports to credit agencies. That means you don’t have to freak out if you forget to make your credit card payment on the due date and remember the next morning – just make the payment as soon as you remember under the 30 day late time limit and you have nothing to worry about.
When you have an account that hits 30 days past due, it will show up as a “30” on your credit report instead of an on-time payment. Once your account hits 30 days past due, on-time payments aren’t going to help you anymore until you get your account up-to-date. For example, you miss a car payment one month and end up 30 days past due. You make a payment the next month and continue making a single payment each month after – in this scenario, you continue to stay 30 days past due on your account and get reported as such to the credit agencies month after month.
Try to never fall into this territory because this is where your credit score starts falling quickly. It will hurt your credit score to have a single account go 30 days past due, but your score will continue to fall if the account remains 30 days past due or even gets worse. Most accounts will go 60 or 90 days past due until they get closed and sent to collections.
Credit Utilization Percentage
Once you have a car loan and a couple of credit cards, now what do you do to improve your score? Usage is another key factor and it can have a double meaning here too – actually using revolving lines of credit or how much of your overall credit limit is used.
For any revolving credit like a credit card, you need to actually use it each month so it can help your score. The key is using it without overusing it (and paying your bill). Except for true emergencies, I only use credit cards to help with my credit score, so I’ll just use them for a single small purchase each month. This can be done at a store or simply by subscribing to a streaming service with each card.
Once you’ve used a card, now you have to be sure you haven’t overused it! The amount of credit used divided by your total credit limit will give you a credit utilization percentage. For example, on a $1000 limit card, a $60 balance gives you a 6% usage rate. When building your score, always keep this rate as low as possible – less than 11% is good and under 5% is best. This usage rate is actually where many people go wrong because they don’t realize that they can’t use most of their available credit without hurting their score.
This is also a good reason to avoid most store credit cards because a $300 limit card at a designer jean store won’t let you buy a single pair without dinging your score unless you have higher limits on your other cards to offset the usage percentage. That’s also key to remember though – your target usage rate is for all of your revolving credit accounts combined and not a single card, so you get more wiggle room on each card if you have a multiple cards.
Credit Card Balance Posting Dates
Once you’re familiar with credit usage rates, it can be more nerve racking to simply use a credit card out of fear of using too much credit, but this fear is at least partially unwarranted. What really matters here is the credit card balance on the posting date. If you look at a credit card statement, you should find a second date in addition to the due date – most call it the post or posting date. That date each month is when your card will report your balance to the credit bureaus. This will likely be a different date for each credit card you have too.
If you need to max out a credit card, you can do it without harming your credit score as long as you pay down your balance before your posting date. So let’s say it’s the 1st of the month. Pay day is on the 7th and I have a $500 credit card with a posting date of the 15th. I can spend $500 on the credit card today and then pay that balance down on pay day and it won’t hurt my credit score. If I’m trying to keep under 5% credit utilization, I would want less than a $25 balance on that card, so I would simply need to pay $475 before the 15th and then the card will report the $25 balance instead.
Simply put, when you don’t pay an account, it goes into collections and it hurts your credit score. It sucks seeing an account in collections on your report, but unfortunately you can’t do much about it once it reaches this stage unless it’s an invalid debt (you can and should dispute invalid debts to have them removed). Unless you owe a company a lot of money that will sue you to get a court judgement, you can usually ignore an account once it’s in collections, at least as far as your credit score is concerned.
Paying off an account in collections will NOT actually help your score. Once you do have accounts in collections, just focus on adding positive marks to your report and wait years for the collections to go away. I still had numerous accounts listed in collections on my credit report when I finally bought my first home and got a mortgage, so the rest of your report is what really matters.
When you realize you have an account in collections, the harm to your score is already done. Despite this fact, it can be easy for this area of your report to distract you and make you think you should pay attention to these items first to make your score better. Unfortunately, this part of your report is almost to remind you of your past indiscretions to avoid making the same mistakes again in the future.
Don’t Give Up!
Unfortunately, raising your credit score won’t happen overnight. It took me about 3 years to go from the low 500s into the 700s. You can’t fake something for three years, so you really have to pay attention to all accounts that report to credit bureaus and make it a priority of yours to NEVER let any payments go 30 days past due.
Even if you slip on credit usage, you can fix those damages by simply lowering your percentage rate again, but never forget to make a payment each month unless you have a zero balance (and if you have a zero balance, you should really use it for a purchase and pay it off instead). With some hard work and dedication, you can achieve a great credit score no matter where you start.