Bad Credit

By Teresa Iqbal

April 12, 2018 4 min read

If you think you have a problem with your credit score, the first step is to review your credit report. Pull reports from all three credit bureaus (Equifax, Experian, TransUnion), as the reports may contain different information and you want a complete picture of your credit health. You are entitled to a free report from each credit bureau at AnnualCreditReport.com every year.

If you find that your credit score is less than ideal, don't stress. There are several ways to repair a credit score. Begin by thoroughly reviewing your reports. Anything that is unfamiliar or looks like an error warrants a dispute, which may help you raise your score.

High credit card balances are one of the main reasons for a lower credit score. If possible, consider budgeting a debt repayment plan, such as the popular "debt-snowball method" made popular by financial expert Dave Ramsey. This method involves paying off debts by focusing on smaller amounts first. Doing so allows you to build momentum as you find satisfaction in paying off balances and motivation to continue paying on the larger amounts until all of your debt is eliminated. Other experts recommend paying off balances with the highest interest rates to save the most money in the long run. Choose the method that makes the most sense to you and will help keep you on track.

If the reason for a dinged credit score is a high utilization rate of credit and you don't have enough income or room in your budget to significantly pay down your debts, then consider applying for a debt consolidation loan. You can find a loan plan that offers a fixed interest rate and payment, which will both typically be lower than those on your credit cards. You choose a length of time to make payments on the loan, with typical lengths ranging three to five years. Debt consolidation loans give you the opportunity to greatly reduce or eliminate credit card balances, which lowers your percentage of credit utilization. And a lower interest rate means that you can save a good amount of money over the length of paying off the debt. You also have an end date for when the debt will be paid off, allowing you to say goodbye to seemingly endless credit card payments. These loans are offered through local banks and credit unions, as well as private companies. Many companies will allow you to complete the application process entirely online and will simply distribute the funds into your bank account if approved.

At this point, you'll need to start rebuilding a record of good credit history. Although individuals with bad credit may qualify for an unsecured credit card, they are likely to come with high fees and interest rates. Instead, you may want to consider applying for a secured credit card. A secured credit card works by giving you access to the amount of money that you deposit into your account, without a credit line. You can use the card anywhere that accepts a credit card. By responsibly paying the bill on time, you can work to build a positive history of payments without paying the high fees and interest rates associated with unsecured credit cards.

Once you have your finances in order and you have room in your budget to take on a new expense, consider applying for an auto loan. Most people can be approved for an auto loan (especially with a sizeable down payment) and the interest rates on auto loans tend to be lower than those offered on credit card accounts. By making your payments on time and eventually paying off the loan, you'll find your credit score steadily increasing.

Reviewing your credit score may be overwhelming and stressful at first, especially if your score is not the best. However, with some strategic planning and and smart decisions, repairing your credit score can be a managable and simple process.

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