Damaged credit can be both stressful and costly—but it can be repaired. As hopeless as your situation may seem, there are steps you can take to improve your credit score (also known as your FICO score).
(1) Review your credit reports for errors. Because your credit reports and credit score go hand-inhand, you first need to order your credit reports. Everyone is entitled to obtain credit reports from the website annualcreditreport.com or by calling (877) 322-8228. You will want to correct any errors found in these reports as they directly affect your FICO score.
(2) Lower your credit utilization. Fifty percent of your credit score is determined by this factor: The amount of credit you have versus how much you are actually using. According to financial managers, the optimum is 10% or lower. As an example, if you had $10,000 of available credit on a card, and were only carrying a $1,000 balance, you would have a 10% utilization on this card.
(3) Make timely payments. Late payment habits can be a huge detriment to improving your credit. 35% of your FICO score is determined by your payment history. A track record of late or missed payments will result in a serious downgrade of your score. In addition, the further behind you are on your payments, the more it hurts your score. So find a way to get caught up on your payments before they are charged off or sent to a collection agency.
(4) Avoid multiple new credit cards. Going on an application spree for retail credit cards raises questions about your sudden need for a larger credit line. Too many credit inquiries at one time looks suspicious, and can reduce your score. So, avoid multiple applications, especially if you are preparing to secure a new loan.
(5) Leave old debt on your credit reports. Some people have the mistaken belief that old debt on their credit report looks bad. Negative items are bad for your score, although most of them will disappear from your report after seven years. However, good debt—debt that you have handled well and paid as agreed—is good for your credit. The longer your history of good debt, the better your score. So leave old debt and good accounts on your report as long as possible.
(6) Diversify your credit types. Installment lines of credit, such as a car loan, student loan or mortgage, contribute to your calculated score. A good credit score has a mix of both installment credit and revolving credit. For example, having both credit card debt and a home equity line of credit. Your balance of credit types accounts for 10% of your FICO score which is significant enough to warrant your attention.
(7) Pay off debt. While perhaps the most difficult step, it is fundamental. Your total amount of “debt carried” weighs heavily on your credit score. While this may take some time and sacrifices, the financial freedom you gain, and the credit score points you make, should be worth it.