How to Fix a Bad Credit Score: Repair Your Credit & Find Financial Freedom

Credit score is a powerful determinant in what milestones any individual can make while trying to plan for the future. Qualifying for credit cards, car loans, apartment leases, mortgages and, in some cases, even employment is dependent upon having a good credit score. Where do you stand in terms of credit score? In general, the credit scores are classified as follows:

• 720 or higher: Excellent
• 660 to 719: Average
• 620 to 659: Poor
• 620 or lower: Bad

Anything below 660 is considered poor or bad credit. So where does that leave people whose credit history is poor or damaged in some way? Fortunately, the credit scoring industry can be “forgiving” in the sense that past credit mistakes aren’t the death of your credit history. However, there is a caveat. It takes time and attentiveness to several factors.

What Causes Bad Credit?

The most significant factor prompting your credit score to fall is payment timeliness. In terms of your FICO score, paying on time accounts for 35% of the credit score calculation. Another whopping 30% depends on the amounts you owe. Thus, 65% of that ever-present, three-digit number hinges on paying on time and keeping your loan balances low.

This is particularly true of credit card balances and limits. While credit cards tend to be the primary way people start or rebuild a positive credit history, they are viewed as the riskiest form of debt from a lender’s perspective.

Credit inquiries can also bring down your credit score - but perhaps not an occasional inquiry, meaning you’ve applied to rent an apartment and they check either your report or score.

Usually, these soft inquiries are part of a general background check. It’s the hard inquiries, such as when you apply for a new credit card or other loan, that can have an impact on your score.

These inquiries are more likely to ding your score rather than deeply damage it, but it’s important to be mindful of all credit decisions and how they can impact financial possibilities in the future.

Habits Moving Forward

Paying on time is the number one way to leverage a boost in your credit score. If you’ve missed payments on your loans or debts, catch up on those as quickly as possible. Keep your credit card balances low and develop a budget to pay them all on time. The difficulty in giving a specific number for what “low” means is due to the fact that each individual is issued a different credit limit. 

There is, however, a guideline: keep your credit utilization below 30%. Credit utilization is calculated via dividing the credit card balance by the total credit card limit. So, if your credit card limit is $500 and you have $250 as an outstanding balance, then the credit utilization for that particular card is 50%. 

In addition to minimizing card usage, it’s wise to resist the urge to open new accounts. First, as previously mentioned, hard inquiries can put a dent in your score. Second, you will increase the credit limit factor used for the credit utilization percentage. Paying off credit cards that are still active accounts, continuing forward with timely payments and keeping the amounts owed low will promote an increase in your score. 

Late payments and drastic financial experiences such as a bankruptcy can linger on your credit report between 7 and 10 years. While you can monitor your report and then ask for the negative reporting to be removed, if it fits within a given time frame (this is where credit “repairing” becomes trickier), there are variations in the aging window that depend on the type of account.

For example, an account sent to collections is likely to stay on your report for 7 years and 180 days. As such, when it comes to those negative accounts, it’s a waiting game. But, this does not prohibit your score from moving forward and adhering to credit card best practices:

• Make on-time monthly payments on your balance or pay off your credit card completely each month.
• Keep the number of credit card accounts low (do you really need more than three?).
• Limit the number of hard inquiries.
• Keep your credit utilization below 30%.
• Opening new accounts, especially if you do so in rapid succession, may be deleterious to your credit score. Be choosy about your lines of credit.

In terms of closed accounts with negative reporting, you can either wait for them to age off your report or proactively ask each of the credit reporting agencies, Experian, Equifax, and TransUnion, to remove them when they’ve hit their respective 7- to 10-year limit.

This might be the more time-consuming route, as they are independent of one another, and you’ll need to approach each one to make the same request.

Barring any discrepancies you may find by analyzing your credit report, it’s likely less of a headache if you move forward by utilizing the credit card best practices and rebuild your credit over time so you can take full advantage of what credit can do for you.