You can suffer financially if you have a bad credit score. It may hinder you from securing future loans, be it auto, house or personal. It may also negatively impact your insurance premiums and interest rates. The good thing is bad credit score is not the end of your financial life, you can recover from it.
Your credit score may fall due to late payments, filing for bankruptcy, errors by credit bureaus and a case of identity theft. The last two reasons are not your mistakes, and you can dispute them legally.
What are the steps I should follow to recover my credit score?
Fixing credit score is not easy, but taking the bold step of starting the process is crucial.The following steps will help you fix bad credit score:
Check and confirm your credit score has no errors
The first step towards fixing your credit score is making sure the report is correct. Sometimes, you may receive a bad credit report but you are sure you pay all your bills on time and you owe no one a debt. If this is the case, there are two reasons for the bad credit:
- One of the three credit bureaus has made an error when processing your report
- Someone stole your identity
If any of the above has happened, there are legal ways to fix it. A financial counsellor or attorney will guide you through disputing an error or fixing an identity theft.
Pay all your bills on time
One of the major causes of bad credit is late payment of bills and loans. You may lack enough money to honour your agreement or forget to make the payment. You can avoid the latter by adopting an automatic payment plan or setting reminders.
You can pay the minimum if you don’t have much money, but if you have more money, making larger or multiple payments may speed up the recovery of your credit score. If some debts are already in the collection authorities, salvaging the accounts that are still in your control may save your credit score.
Keep your credit utilization ratio low
Credit utilization ratio or credit rate is the amount you owe in debt compared to your credit limit. For instance, if your credit limit is $1000 and you have debts accumulating to $500, your credit utilization ratio is 50%.
A high credit utilization ratio lowers your credit score. Experts recommend keeping your credit rate between below 30%.
Seek assistance from friends and family
Sometimes, you may look for ways to boost your poor credit score and hit the wall. In such times, it would be a good idea to ask for help from friends and family. There are two ways in which they can help you:
Making you an authorised user on a credit card
When a family member or a friend lists you as an authorised user on a credit card with good credit score, your credit score will go up. However, make sure the person has good credit repayment habits to avoid worsening your situation.
Co-signing on a loan or credit card
Bad credit score can hinder you from qualifying for loans or credit cards. You can still access loans through your friends or family if they accept to be a co-signer for a new loan or credit card. However, make sure you will repay the loan on time to avoid pulling the person into a bad credit situation.
Manage your debts
If you are stuck with debts, seeking help from experts to manage your debts can help repair your credit score. These experts can help you by:
- Consolidating your debts
- Credit counselling
- Debt management
How long does it take to fix my credit score?
Recovering your credit score can take between few weeks and ten years. It depends on the reasons behind the bad credit. For instance:
- Chapter seven and chapter 13 bankruptcy remain in the credit report for seven years and ten years respectively.
- Judgement from small claims court remain in your credit history for up to seven years
- Hard inquiries stay on the credit report for two years. A hard inquiry is when a lender reviews your credit report during a loan application. Whether the loan is approved or rejected, the credit bureaus record the inquiry, negatively impacting your credit score.
Bad credit score can have your future loan applications rejected or high interest rates on new loans. Failing to pay bills, credit bureau errors and identity theft can lead to a bad credit score. You can recover from the bad credit by disputing the errors, correcting the identity mishap, paying your dues on time, seeking help from family and friends and getting help from credit repair companies.