How To Fix Your Credit: 9 Important Steps

Whatever the reasons for your poor credit score — late payments, defaulting on a loan, high credit card balances — the best that can be said about a low credit score is that it’s in the past. While the financial missteps you’ve already made cannot be erased, nothing says they must haunt you forever.

There are ways to fix your credit score, starting today. It will take some time, and definitely some awareness and financial discipline on your part, but there are several positive steps you can take to repair your credit.

Why Is Your Credit Score So Important?

Your credit score is very important — more important than you may think. For a quick refresh, your credit score is a three-digit number between 300 and 850 that lenders, banks and other companies use to evaluate how likely they are to recoup any loans they provide. Your credit score changes monthly and reflects your payment history, credit utilization, credit age and other factors.

Lenders use credit scores to determine eligibility for various loans, mortgages, and credit products. Your credit score also impacts the range of interest rates and credit limits lenders and banks may offer when you apply for things like a mortgage, a car loan or a credit card. In short, a higher credit score translates to lower interest rates and better terms, which can save you literally tens of thousands of dollars over the course of a large loan, such as a mortgage.

But your credit score also impacts nearly every financial transaction you make, large and small, every day. It can impact your application for an apartment rental, utility services, or even a new cell phone. Anyone giving you a service in anticipation of you making monthly payments will use your credit score to determine if you’ll make your payments on time.

So, let’s go over how to fix your credit score, step-by-step.

How To Fix Your Credit In 9 Steps

When you embark on a plan to fix your credit score, there are two things you must understand from the start: 1.) It’s going to take some time; and 2.) It’s an ongoing process — not a one-time fix.

Further, even before you implement any tangible steps toward credit repair, you need to know how to look at your credit score and understand everything that goes into its calculation.

As you begin to take the steps necessary for repairing your credit, you’ll see that these are not just one-time actions but repeatable habits that you’ll need to build into your financial health routine. It also helps to know that your credit score is weighted to reflect some factors more than others. There are five main components that create a credit score: 

1. Payment history – 35% 
2. Credit utilization – 30% 
3. Length of credit history – 15% 
4. Types of credit accounts – 10% 
5. New credit – 10%

1. Check Your Credit Report

Your loan and bill payment history, credit and loan applications, and other financial behaviors are regularly reported to the three major credit bureaus: Equifax^®, Experian™ and TransUnion^®. Consequently, your credit score is frequently changing. Checking your credit score on a regular basis can help you spot any errors or missing information.

The three credit bureaus can supply you with a free credit report every week, based on your request. You can also order a credit report through AnnualCreditReport.com. You'll need to request a separate report from each bureau. Additionally, a money management app such as Rocket Money^SM will provide credit score monitoring.

2. Check Your Credit Utilization Ratio

Whether you have one credit card or five, it’s important that you maintain a low credit utilization ratio across all of those accounts. Your credit utilization ratio reflects the percentage of the combined balance, or debt, you hold on all your credit cards against the total possible limit of those cards.

For instance, if you have $1,000 of combined balances on three cards, and the total credit limit on those cards together is $10,000, your credit utilization is $1,000/$10,000, or 10%. Such a score is considered low, and it contributes to a higher credit score and a greater chance that you’ll get a loan when you need one.

3. Pay Down Your Debts

Whether it’s an outstanding student loan, a credit card balance or a personal loan, most people have some debt, but banks and other lenders expect that. What’s important is that you have a record of managing your debt and keeping it as low as possible. One way to fix your credit score is to first look at all of your loans and balances and then make a plan, if necessary, to pay down some of your debts.

When you apply for a loan and provide the bank with your financial information, lenders will calculate your debt-to-income ratio (DTI). Your DTI compares your combined monthly debt payments to your monthly income. These include accounts with revolving debt like credit cards and those with installment payments like auto loans, mortgages and personal loans.

To determine your DTI, take your total monthly loan payments and divide it by your monthly gross income. For instance, if your monthly gross income is $5,000 and your total monthly debt payments add up to $2,250, your DTI is 45%.

Lenders have their own criteria as to how high of a DTI they’ll consider when assessing a borrower’s loan application, but most prefer it at 36% or less. If yours is a little higher than that, there are a number of strategies for attacking excessive debt. Aside from the more obvious ones, like increasing your income and spending less, two of the most common include the avalanche method and the snowball method.

With the avalanche method, you’ll attack the debt with the highest interest rate first since it’s the most expensive. Here, you’ll make more than the minimum payment — as much as you can while still making sure you stay current on all other debts — toward the debt with the highest interest rate. Once the highest-interest debt is paid off, you take the next highest-interest obligation, and so forth until they’re all paid off.

Using the snowball method, you’ll start with the smallest balance and then put as much money as you can toward it in order to pay off the loan while keeping current on all other debts. Once that’s paid off, you move on to the next largest balance and your payoff journey keeps gathering momentum and eating up more debt just like a snowball rolling downhill.

4. Make On-Time Payments

As noted above, your payment history is the highest weighted factor in calculating your credit score. It’s very important that you make at least the minimum payment on your loans and revolving credit accounts like credit cards. With a money management tool like the Rocket Money app, you can set up auto pay on all these accounts to make sure you don’t miss a payment.

Most credit card companies don’t report a late payment to credit bureaus until after 30 days. While you may still incur a late fee for missing a payment, if you pay your balance within 30 days, you can typically avoid it showing up on your credit report. However, late payments typically remain on your credit report for about 7 years and can affect your credit score during that time. Read your card’s terms and conditions or ask your credit card company for more information.

5. Consider Consumer Credit Counseling

If you find yourself in debt to the point that you’re overwhelmed and getting calls and letters from creditors, you should strongly consider getting some consumer credit counseling. Credit counseling is a service for those struggling with bills who need help developing a path out of debt. It’s usually provided by nonprofit organizations for free. While it’s available to anyone, it’s geared toward those who feel buried by debt.

Credit counselors devise debt management plans, accounting for income and budget, to help people take control of their finances. Instead of making several debt payments to your lenders and creditors each month, you make a single payment to the credit counseling company, and they pay your debt on your behalf. They can also help negotiate with the lenders and creditors to lower your interest rate or monthly payments.

6. Consult A Credit Repair Company

You have the legal right to challenge anything on your credit report yourself (and you should make a regular habit of reviewing your credit report for errors), but many people find the process intimidating and/or time consuming and prefer to hire a professional.

A credit repair company is a third-party service that contacts the three major credit reporting bureaus (Experian™, TransUnion® and Equifax®) on your behalf. For a fee, the company works to remove inaccurate or negative information like a reported late or missing payment that you made on time, an account that was falsely opened in your name, accounts you thought were closed but remain open and other inaccuracies about you or your financial activities. 

If you do hire a credit repair company, be prepared to pay several hundred dollars at least. How much you’ll pay depends on the company, what kinds of service they provide and the number of issues on your credit report.

Just be aware that the credit repair industry is known for scams and bad actors. This is because people with bad credit just want their problem to go away and can fall for quick-fix schemes. First and foremost, no credit repair company can get information scrubbed from your credit report if that information is actually true. If they claim they can, stay away.

7. Keep Unused Credit Cards Open

Even if you’re no longer using it because you are trying to avoid taking on more debt, there are a few reasons why it’s actually bad to close a credit card. The main one is that your length of credit history is one of the top factors in determining a good credit score, so keeping an old card active with a zero balance is a good thing.

Further, having a card with, say, a $5,000 limit and a zero balance drives your credit utilization rate lower. Which is a good thing, as discussed above.

8. Take Out Credit Only If You Need It

While taking out credit can help increase your credit limit, which in turn lowers your credit utilization, the credit bureaus look at too many credit inquiries in a short span of time as suspicious and will ding your credit score. This includes loans as well as credit cards and other lines of credit. Having several cards and too much available credit might make it easier for you to justify unnecessary spending or carry a higher balance.

Since everyone’s finances are different, it’s difficult to pinpoint the correct number of lines of credit to take out. For most people, it’s okay to have two or three credit cards (especially if they have rewards points), but keep the balances low at all times.

9. Become An Authorized User On A Credit Card

Many people consider being added as an authorized user because they don't have a credit history or have a low credit score, and it’s keeping them from qualifying for their own credit cards or loans. An authorized user is an additional person on a primary cardholder’s credit card. In many cases, the primary cardholder is a parent or other close family member.

Once your name gets added to the cardholder’s account, the credit card issuer can send you a card with your name on it. Because you don’t own the account, you’re not legally responsible for the monthly card payments – the primary cardholder is. However, if you and the primary cardholder use your cards responsibly, being an authorized user can help boost your credit score.

Benefits Of Repairing Your Credit

There are numerous advantages to having a better credit score. Quite simply, a strong credit rating opens doors and saves you money. Here are some of the key benefits of repairing your credit score:

• Lower interest rates: Banks and other lenders will offer you a lower rate because they see you as less of a risk. It may not seem like a lot, but a difference of 1% – 2% on a long-term loan can add up to thousands of dollars in savings over the course of repaying the loan.
• Lower insurance rates: Insurance companies also look at your credit score and will offer you a lower premium to attract your business. If they think you’re a good bet to make your payments on time, you’re a more attractive customer.
• Higher credit card limits: Your higher credit score will qualify you for higher limits on your credit score, which can be a big help if you have a sudden financial emergency, such as a big medical bill or major car repair.
• Lower credit card interest rate: Credit card interest rates are already notoriously high, but a strong credit rating can qualify you for the lowest rates.
• More and better housing options: Not only will a strong credit score qualify you for a bigger and better mortgage, it’s also a key factor that landlords consider when you apply to rent an apartment.
• More attractive to potential employers: Yes, some companies will look at your credit score as part of the background check process when you apply for a job. A strong credit score is a testament to your attention to detail and personal responsibility. 

FAQs

Raising your credit score will require patience, financial discipline and the knowledge of what to do and not do. Here are some frequently asked questions about credit repair.

What is the quickest way to repair my credit score?

There are no instant fixes to a low credit score, but you can probably start making an impact most quickly by lowering your credit utilization rate. Do this by paying down credit card balances on time and — if possible — completely to zero every month. You can also lower the percentage of what you owe compared to your available credit by applying for a higher credit card limit.

Are credit repair companies legitimate?

There are lots of good-faith credit repair companies in the marketplace, but the industry also has plenty of bad actors who prey on people who are anxious to get out of a pile of debt.

Before signing a contract with a credit repair company, do some research to make sure they’re reputable. Good signs include multiple positive reviews from customers, a positive and active social media presence with plenty of happy clients, good standing with the Better Business Bureau and the Consumer Financial Protection Bureau and a long track record of being in business.

How can I fix my credit for free?

Anyone can contact the major credit bureaus directly to dispute bad information on their credit report. It may take time and you will have to provide documentation to support your claim, but it’s possible. There are also numerous nonprofit credit counseling services available that can provide help for free. Just be aware that you cannot have information removed from your credit report if it’s true. The best way to fix your credit score for free is to pay down your debts and pay your bills on time.

The Bottom Line: There Are Many Ways To Fix Your Credit Score

While there is no quick fix to repairing your credit score and no way to remove true information about missed payments or loan defaults, you can always build your score back up to a level that’s considered acceptable or even excellent. It just takes time and the financial discipline required to pay down your debt.

The best way to avoid major problems is to stay aware of your credit score. For a 100% real-time overview of all your finances, including your current credit score, download the Rocket Money app for instant awareness of any credit problems that arise.