Skip to content

How to Fix a Bad Credit Score in 5 Steps

bad credit score

Sometimes people make poor financing decisions or face challenges that make them default on their credit payments. When they default in paying their credit, their credit scores deteriorate and lock them out of future credit opportunities. However, a bad credit score does not mean the end of the world because there is a way to improve it.

How is credit score calculated?

The credit score is sometimes called the FICO score because Fair Isaac Corporation pioneered a model for calculating credit scores. For this reason, FICO score is the most popular and widely used type of credit score. This credit score number predicts how likely a borrower is able to pay back a loan on time.

Additionally, credit score not only determines if the borrower qualifies for a loan or a credit card but also determines the interest rates on loans. Therefore, lenders are keen to check each borrower’s FICO score when reviewing loan or credit card applications.

bad credit score

Dangers of having a bad credit score                                  

Many people know that a bad credit score means that the individual has not been paying bills and credit on time and is likely to repeat the same behavior in the future. Therefore, such an individual is considered a risky borrower with little to no chance of securing another credit.

According to FICO, a score of below 670 is considered a bad credit score. Anyone with those credit scores may not get a loan easily unless the lender is convinced that the score will improve. Therefore, a bad credit score spells doom for borrowers.

Now that you know what a bad credit score is, let us look at the dangers of having a bad credit score. First, you will have fewer loan options when you have a bad credit score. Additionally, you may only get loans with high-interest rates. Therefore, improving your credit score and keeping it well above the recommended safe level is a good idea everyone should embrace.

The surest way to improve your bad credit score is to understand and fix the five factors affecting your credit score. These factors are the amount owed, payment history, new credit, credit mix, and the length of the credit history. This article contains valuable tips and tricks you can use to fix these factors and realize an improvement in your credit score.

1. Maintain an impressive payment history

Credit payment history is the most significant factor determining credit score because it accounts for 35% of the credit score. This component shows whether the creditor has been repaying past loans and credits.

With this understanding, you should maintain an impressive credit repayment history to improve your credit score. Therefore, you should pay all your loans and clear your credit card debts on time. Remember that any unpaid credit will hurt your credit score.

I advise people to utilize autopay services to avoid defaulting on monthly payments. When you set your bills on autopay, you do not always have to remember to pay them, especially when you pay multiple service providers. Additionally, autopay will show the creditors that you have maintained a consistent payment history for your bills.

I know that some bills cannot be paid through autopay. For instance, you cannot pay medical bills through autopay because you do not know when you will get sick. However, you can create an emergency fund which you will use to clear such bills immediately after you receive them. In so doing, you will maintain an impressive payment history that will improve your credit score.

2. Reduce the amount owed to creditors

It is economically unwise to have huge debts when you are not in a position to repay them. Therefore, ensure the money owed remains low to improve your chances of repaying. Nevertheless, it is recommended that you take credit only when necessary to avoid accumulating huge debts. Lenders will be less to likely believe in you when seeking new credit facilities if the amount owed to other creditors is high.

When you have huge unsettled loans, you appear more risky to lenders. Some lenders will fear offering loans to someone who already owes other creditors large sums of money. Additionally, a person who owes other creditors large sums of money may be at risk of overspending. Ultimately, that person may fail to repay loans on time. Lenders often avoid giving out more credit to those who owe other creditors large sums of money.

3. Avoid applying for new credit

Some people are tempted to take new loans when they have other unpaid loans. This habit may hurt your credit score because lenders may check if you have recently applied for new credit. Every time you apply for credit, the lender will run a hard credit check. The bad thing about hard credit checks is that they will be recorded in your credit report.

Therefore, it is recommended that you avoid any hard inquiries if you have an outstanding loan because it will appear on your credit report and affect your credit score. The best advice I give people is to avoid applying for credit if they have at least two types of unsettled debts. You reduce your credit utilization ratio when you avoid applying for new credit. As a result, you increase your chance of getting credit because your credit score will improve.

reduce borrowing to correct your bad credit score

4. Have a reasonable credit mix

The credit rating bureaus consider the variety of credit facilities people have when rating them. Some people often have a mix of different types of credit, like installment loans, credit cards, mortgages, and store accounts. A mix of credit may increase the credit score if the repayment history is good.

If you want to improve your credit score, ensure you have a mix of different types of credit. However, only have the ones you know you need and can repay on time. Although having a mix of different types of credit can improve your credit score, you should not give it much attention because it only contributes 10% to your credit score.

When you have different types of credit, you will be forced to decide which you will pay first. You may have a credit card with high-interest rates or small debts. In such cases, you can use the snowball or debt avalanche method when repaying your credit card debts.

If you choose the avalanche method, you will pay minimum payments on all debts owed and use the remaining money to pay the debts with high-interest rates. Paying the debts with high-interest rates first will save you money in the long run.

On the other hand, if you choose the snowball method, you will need to pay the small debts first. Small debts are easy to repay because you only need a small amount to clear them. Then, you can plan how to repay the bigger debts. Although this method is good, it may be a trap for some borrowers because they may default on the big debts while clearing the small ones.

Regardless of your chosen method, ensure that you pay all the different types of debts you have. You will improve your credit score significantly if you do not default on any credit obligation you have.

5. Have a long credit history

A long credit history will help you improve your credit score. Therefore, ensure you leave your credit card accounts open and active even if you are not planning to take credit now. The lenders want to know how long you have been taking credit and repaying them. You will have a higher chance of getting credit if you have a long credit history.

The credit ranking bureaus assume that a person with a long credit history is easier to rank that a new borrower. This assumption seems reasonable because a person with a long credit history is “tried and tested.” As a result, the lenders can predict if the borrower will likely pay off the loan on time or default with more certainty when there is enough historical data.

However, long credit history may not help if your repayment behavior is poor. Lenders can consider a person with a shorter credit history if they have proven to make timely payments. Therefore, maintain a long but positive credit history because it will improve your credit score.

The bottom line

You have seen that a bad credit score can be detrimental to your financial planning and success. No one wants to be locked out of credit funding opportunities due to bad credit scores. Therefore, you should also be keen to improve your credit score to reasonable levels to qualify for credit. You already know that a FICO credit score below 670 is bad and can lock you out of future credit opportunities. Consequently, if you have a bad credit score, you can apply the above tips and tricks to fix it. The tips are based on the five factors that determine the credit score, meaning that if you follow them to the letter, you will improve your FICO score.