It's common knowledge that your credit score can be negatively impacted by even a few missed credit card payments or borrowing too much money. Though it’s much harder and takes more patience, you can also increase your score—thank goodness that one unfortunate decision doesn't have to define your financial health forever!
If you find yourself in this boat, here's what you need to know to recover your credit score.
Your credit score isn’t a random calculation of your financial worthiness. There’s a method to the madness. Before you can rebuild your credit score, understand what factors influence it so that you can focus your efforts in the right direction.
These are the key factors that make up your credit score:
Identify the problems with your credit score. Do you have a history of late payments? Do you max out the limits on your credit cards? Do you open new credit cards often?
Once you begin to understand what caused your score to fall, you can follow these steps to correct the course.
Carefully look at your credit report. We’re all human (yes, even the people handling and recording debts), and there’s always a chance that someone made a mistake on your report. If you find one, the Federal Trade Commission (FTC) has a well-laid path for you to get it corrected:
Step 1: Notify the credit reporting company which information you think is inaccurate. Use the FTC's sample dispute letter to ensure you include all essential information. Include copies, not originals, of documents that support your position."Both the credit bureau and the business that supplied the information to a credit bureau have to correct information that’s wrong or incomplete in your report. And they have to do it for free. To correct mistakes in your report, contact the credit bureau and the business that reported the inaccurate information. Tell them you want to dispute that information on your report." -Federal Trade Commission Consumer Advice
For more information on this process and what's required, visit the FTC: Disputing Errors on Your Credit Reports.
Since credit utilization makes up 30% of your credit score, the lower the balance of your credit card, the better. Many follow the 30% rule, which advises consumers to spend up to 30% of their credit limit but not to exceed it. Even if you make regular payments, the high credit balance can negatively affect your credit score since utilization is a key part of your overall score.
The length of your credit history matters, so keep older accounts open and active, even if you don’t use them often. Check to make sure there are no associated fees.
Paying your bills on time is the best way to improve your credit score. If this is something that you struggle with, there are a few tools to help you create better habits.
Have a family member or friend with impeccable credit? Although mixing family with personal finances isn’t always the best idea, becoming an authorized user can help raise your credit score. You don’t have to spend money or use their account to have your name associated with their positive financial footprint.
Hopping on the phone with your creditor can help accomplish a few credit-impacting issues.
Get out of debt! There are a variety of approaches to help you get out of debt:
Before engaging in one of these methods to get out of debt, it's suggested to speak with a financial advisor and research to ensure that you choose the one that best suits your needs and goals.
If your credit score dropped and you're in the thick of recovery to regain financial freedom, remember that paying off debt and rebuilding your score requires sacrifice and significant time, depending on how deep your debt goes. Set a plan and stick to it!