Bad credit can be a sock in the jaw to your finances.It can keep you from getting a mortgage, a credit card, even a job. And if your credit report has a mistake, the error may lower your credit score.
But there's good news. Even if you've dug a major credit hole, you can still right your wrongs. A good score may also help when you're job hunting since potential employers can request reviews of your credit records.
Here are some steps you can take now to improve your finances -- and your credit score:
1. Check for mistakes. By law, you can get your credit report free once a year from each of the major consumer credit reporting agencies -- Experian, TransUnion and Equifax -- at AnnualCreditReport.com. You're also due a free copy if you're a victim of identity fraud or if you've been turned down recently for credit, employment or insurance, based on your credit information.To keep better tabs on your credit, request one free report from a different agency every four months, instead of ordering one from all three agencies at the same time.If you see something off base, contact the credit reporting agency immediately to correct the error.
2. Know the score. Your credit score is a three-digit number that reflects whether you're a good credit risk. The scale generally runs from 300 to 850 -- the higher, the better. A late payment or notice that your account has been sent to a collection agency can subtract 35 to 100 points from your credit score. New York Certified Financial Planner and Practitioner TM Clare Stenstrom suggests aiming for 780 as a solid target score. Though you can get your credit report free, you'll have to pay for your credit score.
3. Pay bills on time. This is the single most important thing you can do to affect your score. Currently, under the credit scoring system developed by Fair Isaac Corp., known as FICO, 35 percent of your credit score is derived from how well you pay your bills on time. For more, see fico.com. Not good about getting things done on time? Consider setting up automatic payment plans so you don't miss the due date.
4. Begin the repairs. If your score is short of ideal, chances are that too much debt may be the cause, either through heavy credit card use, loans or a combination of both. This can account for as much as 30% of your score. If that's so, begin paying down debts aggressively, starting with the one that has the highest interest rate. "Lenders compare your debt-to-income ratio to determine the amount of money you can borrow for a loan," says Candy Wright, a counseling manager for the nonprofit consumer credit counseling agency GreenPath. "Excessive debt will lower your credit score and reduce your buying power."
5. Use credit cards responsibly. If credit card use has put you in financial straits, consider cutting up problem cards once you've paid off the balances. But don't close the accounts -- accounts that stay open a long time help build good credit. And, keep at least one card active once your debt is under control. Using that card responsibly can help you rebuild a solid credit record.
6. Be patient. A bad credit history usually doesn't happen overnight, nor can it be fixed in the blink of an eye. If you're paying down debt and staying current with your bills, Stenstrom says you should begin to see upticks in your score within a few months. It can take as little as six weeks and as long as two years, depending on the amount and type of damage.But it's worth it. A 50- to 100-point improvement in your credit score can save hundreds to thousands of dollars in interest charges on a loan, depending on the original loan amount.
7. Don't fall for credit repair scams. There are scads of services that make all sorts of outlandish claims, from fixing your credit score to eliminating debt outright. Don't bite. Not only are many of their pitches pure scams, you can and should repair your own credit -- free of charge.
For more information about boosting your credit score, visit Military.com's Credit and Debt Center.
