Having a good credit score can help you qualify to borrow money for major expenses like a mortgage, home equity loan, or car loan. Your credit score can also determine the interest rate you will pay when you do borrow money, whether it is for a major purchase or for a credit card that you may want to use to earn reward points or in an emergency. Unfortunately, while it takes years to build good credit, one or two missed bills can ruin what you have worked so hard to build and leave your credit score hundreds of points lower than it was just a month before.
There may be times when you have trouble paying all of your bills on time. Financial difficulties or personal circumstances might make it impossible to make timely payments. Unfortunately, missed payments may be reported to credit reporting agencies after only a few weeks or months, bringing credit scores down more with each reported delinquency. Paying off the delinquent account can help bring your score back up some, but will not completely erase the hit taken by your credit score when you pay a bill late.
There is no quick fix for improving your credit score, no matter what some companies want to tell you to the contrary. With some diligence and work on your part, however, it is possible to improve your credit score over time and get back to where you want to be. By taking a number of helpful steps, your credit score can rebound and once again be a tool you can use to meet your financial goals.
Improving Credit Basics
Understanding Your Credit Score
Your credit score includes several different components: how much credit you have available, how much you are using, and whether you have paid those credit accounts on time. There are three different credit reporting agencies in the U.S.–Equifax, Experian and TransUnion–and your credit score may be different with each of them because not all creditors report to all three agencies. When a delinquency is reported to a credit report agency, however, it can stay on your credit report with that agency for up to 7 years.
Checking Your Credit Score
You can check your credit score for free once per year on a number of different websites, most of which don’t require you to give any payment information to get your free report. Free credit reporting has also become available as part of your account services with many credit cards in recent years, giving consumers another free way to check their credit scores (although credit card companies typically only give the score from one of the three credit reporting agencies). Checking your credit score with all three agencies once a year should be sufficient unless you plan to make a major purchase that would require you to borrow money.
Use Credit Cards Responsibly
Credit cards are an easy way to buy something today and pay for it next month, or over many months if you choose to make the much smaller minimum payment. It can be a little too easy to use credit cards, however, and if you’re not careful, you could find that you rack up large balances, which may make it harder to make even the minimum payment. When used responsibly, credit cards can help build your credit score, but if you can’t pay what you owe, your credit score will be brought down very quickly.
Building Credit Fast
One of the fastest ways to build credit is to get a credit card and make purchases, then pay the balance off right away or over a short period of time. Keep in mind that it hurts your credit score if you are using more than about 30 percent of your available credit on the card. When you have no established credit, you may need to get a secured credit card, which requires you to deposit money with the company to secure the account. Credit-builder loans work similarly, with the lender holding your money in an account until you repay the loan. Getting a co-signer or becoming an authorized user on someone else’s card are other good options for building credit, which takes at least 6 months.
Fixing Credit Reporting Mistakes
If you find a mistake on your credit, you can request that it be taken off your credit report by disputing it online or writing a letter to the credit bureau. Mistakes do happen and can cause difficulties when you want to borrow money, so you should correct any mistakes you find when you check your credit, especially when you plan to make a major purchase in the near future.
Paying Off Delinquent Accounts
If a delinquency is recent, paying it off will improve your credit score more than if it is older. After 7 years, a delinquency should come off of your account except for certain types of student loans, which can remain until they are fully paid off. You may be able to make payment arrangements with a creditor to settle the debt for less than you owe, but doing so may not improve your credit score because accounts reported as settled are still considered negative for your credit.
Paying Down High Balances
Using more than about 30 percent of your available credit on a credit card or home equity loan is detrimental to your credit score, so making an effort to pay down high balances can be one of the best ways to quickly improve your credit score. Even if you can only pay a few dollars more than the minimum balance each month, you will make progress over time and will eventually find yourself in a much better financial position.