By Erin El Issa
If you've found yourself looking for bad-credit credit cards or being turned down for loan applications, you may be wondering how to fix your credit. The bad news? To fix bad credit and raise your credit scores substantially, you must change your habits, and that takes time and patience.
But there are still steps you can take today to support your credit. Along with paying your bills on time and in full, you can try these tips to bump your scores.
1. Check your credit reports
A 2013 study by the Federal Trade Commission found that one in four consumers' credit reports had an error that could affect their credit scores. There's no sense in paying for mistakes you didn't make, so keep an eye on your credit reports. Look for:
- Incorrect addresses or other personal information. This may be a sign that your accounts are being mixed up with someone else's.
- Outdated information. The Fair Credit Reporting Act sets standards for how long negative information can remain on your report. For example, missed payments may appear for seven years and bankruptcies for 10. Ask to have any older items removed. And if you've received a higher credit limit, you may ask for a report update. A higher limit helps your credit utilization ratio, which is a big factor in credit scores.
- Duplicates. Does the same debt appear on a report more than once? Even if it occurred within the last seven years, all but one mention should be removed.
- You're entitled to a free credit report from each bureau once a year or if a company denies your application because of poor credit. Take advantage of these services.
2. Lower your credit utilization
Divide your total credit balances by your total credit limits, and you'll find your credit utilization ratio, an important factor in your credit scores. Generally, the more available credit you use from month to month, the worse your score will be. You can improve your ratio a couple of ways:
- Pay down your debt. Keeping your balances low may not be easy, but it is a great way to improve your credit standing. Paying more than once a month can help, if your issuer allows it.
- Get a higher credit limit. A higher limit will immediately drop your utilization rate, as long as you don't spend more. If your card issuer offers to raise your limit, take it -- unless you know it will trigger more spending. If your issuer doesn't offer, you can ask for a higher limit. That might trigger a credit inquiry, however, which may hurt your score for six to 12 months, so use this option carefully.
3. Be smart about credit applications
Your credit scores depend on a few, sometimes conflicting, rules about new credit. Applying for new credit triggers a credit inquiry, which is bad. But having more of it, especially different kinds, is good. How should you reconcile these rules?
- Don't apply for new cards or cancel old ones. Having balances on many accounts reflects negatively on your credit, but simply having more available credit in total is a positive. Don't cancel old accounts, but don't apply for new ones, either.
- Consider a personal loan. Using a personal loan to pay down your debt can add a new type of credit to your report -- installment rather than revolving credit -- which is positive, as long as you're diligent about making payments. You may also get a better interest rate than you have on your credit card debt.
- Cluster new loan applications in a short time frame. If you must apply for an auto or mortgage loan, restrict these applications to as brief a window as you can. This will prevent multiple inquiries from posting on your credit reports.