Bad Credit Score? Here’s How to Fix It
Having poor credit can be stressful, especially if you’re applying for a mortgage or auto loan or making a big purchase. Before you can fix a problem with your credit, you need to determine the root cause. Several factors contribute to your credit score, and it takes a while for changes to be reflected with the credit bureaus.
Piedmont Advantage Credit Union can help you take steps to improve your credit and work toward healthier financial habits. Let’s explore what makes up your credit score and how to fix bad credit through a five-step plan.
Credit Score Criteria
Before determining how to improve your credit, it’s helpful to understand what makes up a credit score. Many banks and credit unions use FICO scores to determine your creditworthiness.
This score is derived from three credit reporting agencies: Experian, Equifax and TransUnion, all of which collect and monitor your financial data. FICO then assigns each person a score between 300 and 850. Not all credit scores are FICO scores, but since FICO scores are widely used, let’s start with a breakdown of how a FICO score is calculated.
- Payment history: 35% of score
- Amount owed: 30% of score
- Length of credit history: 15% of score
- Credit mix currently in use: 10% of score
- New credit: 10% of score
Step 1: Get a Free Copy of Your Credit Report
The first step toward fixing bad credit is to know what is being reported about you. The easiest way to do this is to get a free copy of your credit report. U.S. federal law entitles all U.S. residents to a free copy of their credit reports once every twelve months, available at annualcreditreport.com. You’ll need to pay extra or use a different service to retrieve your actual credit score.
Step 2: Review Your Credit Report for Errors
One of the easiest ways to improve your credit score is to fix errors. But before you can fix them, you’ll need to review your report and identify any mistakes. Over a quarter of consumers surveyed by the Federal Trade Commission found at least one potential error in their credit reports that may have affected their scores. According to the same FTC study, 20% of consumers saw corrections after disputing those errors. Here are some common errors to look for:
- Wrong street address
- Wrong name (look out for a similar name or suffix on your report)
- Fraudulent accounts or accounts you didn’t open (this could be a sign of identity theft)
- Incorrect account information such as:
- Inaccurate credit limits
- The wrong origination date on a loan
- Accounts mistakenly shown as being open or closed (look to see if there’s a notation on the account saying whether you or the creditor closed the account, and whether that’s accurate)
- Wrong payment status information
Step 3: Dispute Errors on your Credit Report
Once you’ve reviewed your credit report for errors, next you’ll want to dispute those errors with the credit bureaus. You can do this by sending a letter (like this sample from the FTC), or you can dispute them online through each of the three credit bureaus. In both scenarios, you’ll want to point out the errors, state why the information is inaccurate, then request that the items be fixed and/or removed.
It’s a good idea to send a copy of your credit report when reporting the error. If disputing by mail, send it via certified mail. If you prefer to dispute your credit errors online, use the links below for each of the three credit bureaus’ pages with information on their processes:
Step 4: Look at Outstanding Debt
Your debt-to-credit (DTC) ratio refers to the percentage of your income that goes toward paying your debt each month. Keeping a lower debt-to-credit ratio can help improve your credit score. Lenders want to make sure you’re living within your means before they allow you to take on more debt. Strategies for lowering your DTC is to pay down your current debt and get an increase on your credit limit without utilizing it.
Step 5: Set Up Automatic Payments
One of the most important factors when it comes to creditworthiness is your ability to pay your bills on time. Utilize Piedmont Advantage Credit Union’s online or mobile banking to set up recurring payments for consistent monthly bills to make sure you never miss a deadline.