Sometimes, things happen and we wonder how we got there. If your credit score is less than stellar and you’re not sure what happened, there are a few common causes that usually result in bad credit. These are only a sampling, but they’re the ones that seem to carry the biggest punch.
1) Late payments – That may not seem like such a big deal, but a history of missed financial deadlines can have a mighty big impact on your credit score, since your payment history accounts for a whopping 35% of your credit score.
2) Stepping over your credit line – If you’ve borrowed against just about all the credit your card — or cards — offers, you’ll not only see your interest rates rise, you’ll probably see your credit score drop. Credit utilization accounts for another 30% of your score. If you’ve done both 1 and 2, your damage points are already around 65%.
3) Bankruptcy – Often, it’s the only way to get out of extreme debt, but it’s also a massive albatross your credit score will be carrying around for seven years. Your score can be rebuilt, but it’s going to take some serious work. If you’ve declared bankruptcy, don’t job-hop afterwards. This won’t affect your credit, but it may be a red flag to potential lenders.
This sounds like the exact opposite of what you should do following a bankruptcy, but you’ll want to apply for new credit. It won’t be easy, but there are cards you can apply for that will go toward rebuilding your credit score.
A secured credit card, for instance. This is exactly what the name implies. You put a certain amount of cash into the account — let’s say $1000 — and your credit limit is $1000. If you make timely repayments, your creditor may increase your credit limit, or even offer you an unsecured card.
Gas and retail cards are usually easier to qualify for, but still help toward rebuilding your score. Make small purchases and be sure you pay them off in full when the bill comes due.
Defaults, charge-offs — where the credit card issuer decides you won’t repay your debt and ceases trying to collect — and a creditor having to get a judgment against you to have the court system force you repay your debt are other blows that can help sink your score.
And sometimes — in fact, very often — things beyond our control happen. A lost job, a divorce, medical bills, can all result in late or missed payments, even bankruptcy. Unfortunately, irresponsibility and a run of bad luck still translate out to the same low score.
Can I Improve My Credit Score?
Yes, but it’s going to take some serious work on your part, and it isn’t going to happen all at once. There will be times you’ll barely see the needle move and you’ll feel like giving up and accepting the score you’ve been given, but don’t.
A bad credit score will affect more than your ability to ever get another credit card at all but the most usurious interest rates. It can also make it harder, if not impossible, to get an apartment, a car loan, or even a mortgage.
So, before that happens, let’s take a look at five ways you can improve your credit score.
The first thing you should do is get a copy of your credit report and find out just how bad it is. This is a written record of your payment history, debt, and credit management (or mismanagement, as the case may be). It may also contain information concerning debts that have gone to collections and judgments against you.(1)
You’ll want to go over this information very carefully and look for any discrepancies. This can stem from something as simple as data entry error, such as a wrong address, wrong birthdate, incorrect Social Security number, or as big as identity theft. Report any discrepancies in writing and keep a copy for yourself.
Credit Card Purchases
Do you still have credit cards? If so, avoid any new purchases, since this is only going to increase your credit utilization ratio (amount of credit available vs. amount of credit you’ve used). It’s best not to use more than 30% of the credit available to you, and to do that, you might want to consider paying with cash for the foreseeable future.
Get Out of Debt
That sounds easy, and it kind of is. You don’t want to take on any more debt until you’ve gotten your current credit record under control. That goes back to paying for things with cash, or doing without them until you have more disposable income.(2)
Paying Late? Not Any More
Pay your bills on time. Late payments can count for up to 35% of your credit score. To make sure you don’t miss a payment, consider setting up auto-pay. Every month on the same date, a set amount will be taken from your account and sent to whichever creditors you’ve specified. It would probably be a good idea to create a special bank account for only auto-payments, rather than risking not having enough money in the main account to cover the withdrawal. An NSF is not going to help repair your credit score. And at the beginning of the month, make sure you’ve put enough money into your auto-pay account to cover all the withdrawals.
If possible, try to pay a little more than the minimum each month. You’re only paying on the interest otherwise, and that’s going to take a while to bring down, unless you make larger payments. Once you get one bill paid off, use that extra cash to pay on the next largest bill.
Maybe so, but don’t try to open any new credit card accounts just yet. Whenever you apply for a new card, the issuer does a “hard inquiry,” or a review of your credit, which will show up on your credit report and impact your score. The more “hard inquiries” into your credit, the more hits your score takes.
If you do open a new account, consider a card that offers a 0% interest introductory rate and do a transfer balance of your highest debt credit card. Pay more than the minimum each month, since all of the money goes toward paying off the balance and not the interest.
Keep That Old Account Open
That may sound counterintuitive, since you’re trying to get out of debt and build your credit, but even if you’ve paid off a card balance, keep the account going. Buy something small with this card, then pay the whole amount off the next month. This will help increase your credit score.
You’re Not Going to Like This
This one may be unpleasant, but if you’re facing financial hardship, you won’t be out anything if you contact your creditors and try to work out a deal with them. Some have temporary hardship programs that will lower your interest rates for a few months while you try to get back on your feet. They may even be able to help you if you know you’re going to be late with or miss a payment. It’s worth asking. (3)
Hang in There
Remember, you didn’t dig this hole overnight, and you’re not going to get out of it right away, but you can get out of it with patience and persistence . You can sign up for alerts to notify you when your credit changes, and as you watch it improve, you’ll want to try even harder to bring those numbers up.
1. Irby, LaToya. “10 Things You Can Do Today to Improve Your Credit Score.” The Balance, 12 Jan. 2021, www.thebalance.com/improve-your-credit-score-960388.
2. Standard Bank. “How to Fix a Bad Credit Record.” Standard Bank, www.standardbank.co.za/southafrica/personal/about-us/financial-education/credit-health/how-to-fix-a-bad-credit-record.
3. Irby, LaToya. “10 Things You Can Do Today to Improve Your Credit Score.” The Balance, 12 Jan. 2021, www.thebalance.com/improve-your-credit-score-960388.