Having a poor credit score can limit your access to many aspects of modern society. For pretty much every type of credit card, personal loan and automotive loan, lenders are likely to request a copy of your credit report as part of their underwriting process. As a matter of fact, these days to simply open a checking or savings account your bank could perform a credit check. This is because bank accounts can get put into overdraft situations which is in itself a form of credit being extended from the bank to you. Your credit score is sort of like your passport into the financial system and so taking steps to build your credit score and safeguarding it are vital. But in life, things happen and regardless of why you might have a very low score (we’re talking something in the low 500 credit score range), there are steps you can take to improve your score.
1. Stop Using Revolving Credit, Unless You Can Pay if Off
Credit Cards are the most popular form of revolving credit and from the standpoint of credit bureaus like Experian and Equifax, are important inputs in the computation of your credit score. The credit bureaus and lenders pay close attention to your utilization ratio, which is the amount of your revolving debt that has been used out of the credit that was extended. For example, if you had a credit card with a $1,000 limit and you have a balance of $970, that would result in a very high utilization ratio and would – all else equal – lower your credit score. Importantly, FICO has highlighted revolving credit as being the area that is most important when they look at utilization ratios. So, a good first step to take if you have poor credit is to immediately stop using forms of revolving credit such as your credit card, and ideally to prioritize reducing these forms of credit. A lower utilization ratio will lead to improving credit score.
2. Consider Debt Consolidation
This is an important step anyone with high debt and poor credit should consider. Not only is it beneficial from a logistical standpoint – by consolidating you move from owing several lenders to just one – but it can also be financially beneficial. Simplifying the number of lenders can also be helpful by lowering the odds that you have late payments, which is frankly one of the primary factors that leads to low credit scores. In addition, often when you consolidate your debt you have the opportunity to improve the average interest rate you’re paying which can lower the total cost to service your debt.
3. Request and Review Your Credit Reports and Sign Up For Credit Monitoring
Once you’ve taken steps to stabilize your credit score and put your score on a positive trajectory, it is a good idea to request a copy of your credit report from the credit bureaus. The report will detail all of the accounts you have open and will also show information about late payments and delinquencies. Examine this information closely to make sure it is consistent with your understanding. The credit bureaus sometimes make mistakes and have an obligation to listen and respond to consumer feedback when consumers notify them of errors. Once you’re comfortable with the accuracy of the information in your credit reports, it’s a good idea to sign up for credit monitoring services. There are many tools and services offered for free online. Credit Karma is one such tool and provides you with daily free access to your credit score and credit reports from two of the credit bureaus in the United States. Developing a habit of checking your credit score at least monthly will help you be proactive in spotting issues in the future.
It’s Never Too Late!
While it might seem impossible to recover from a credit score below 600, the truth is that it is never too late to make changes, and by enacting these changes, and commencing good credit behavior you will start to see an improvement in less than a year, and over the course of a few years your credit score could improve quite significantly.