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Good people can have bad credit
There are a number of reasons why you have bad credit and maybe it's not even something you did. It might be because of something in your credit reports that's there by error. The three credit reporting bureaus (Experian, Trans Union, Equifax) process thousands of items a day. This means that strange things can show up on credit reports. If you haven't seen yours recently – or ever – you can get all three on the site AnnualCreditReport.com. You will need to review each of them carefully, which is about as exciting as reading the phone book. But it will be worth the effort if you find an error that’s dragging down your credit score.
Conversely, you could have bad credit because you had been hit by a huge emergency expense like a hospitalization, an automobile accident that totaled your car or a death in the family that caused you to fall behind on your bills.
Maybe it was your fault
Of course, maybe it was your fault that you have such a low score. You might've run up your credit cards past their limits, were consistently late in making your payments or some of your debts had been written off. In other words, you just didn't use credit sensibly and are now paying the price in the form of a low credit score.
Step #1: Review your credit reports
If you haven’t already reviewed your credit reports, this is step #1. Reviewing your credit reports is the only way to learn why you have bad credit. Each of the three credit bureaus’ credit reports will have slightly different information, which is why you need to review all three. Look for late payments, high debt-to-credit limit ratios (more on this later), collection activity, judgments and liens, If you find any of these items they are what’s damaging your credit score.
Since credit reports can be a bit confusing, here's a helpful video that explains how to read them and shows examples of both a good and bad credit report.
Step #2: Try for “pay for delete” to eliminate late or missed payments
There are five components that make up your credit score. The first is your credit history, which accounts for 35% of your score. If you found you had late payments or had missed payments, try contacting the lenders and ask them to remove the items from your credit reports in exchange for payments. This is called "pay for delete”.
Step #3: Work on your debt-to-credit limit ratio
Your debt-to-credit limit ratio accounts for 30% of your credit score. You can calculate yours by dividing your total credit limits into the amount of credit you've used. For example, if you have a total credit limit of $20,000 and have used $10,000 of it, your debt-to-credit limit ratio would be 50%, which is much too high. You could improve this ratio by paying down some of your debts. Using the previous example if you were able to pay down $5000 of the credit you've used, your debt-to-credit limit ratio would drop to 25%, which should help improve your credit score.
Step #4: Get a secured credit card
The next step in rebuilding your credit should be to get a secured credit card. This is where you deposit a certain amount of money to "secure" the card and can then use it until its balance reaches zero. However, you don't want that to happen. You will need to keep depositing money on the card so that you can continue using it for maybe as long as a year. If you sign up for one of these cards, make sure that how you handle it will be reported to the three credit bureaus so you will begin building a better credit history. Some of the most popular secured credit cards are Discover it® Secured Card, the Capital One® Secured MasterCard® and the OpenSky® Secured Visa® Credit Card.
Step #5: Get a credit builder loan
There are credit unions that offer what are called credit builder loans. If you are able to get one of these, the money you borrow will be put into a savings account. You will make monthly payments on the loan and when you pay it off, the money and the interest you’ve earned is yours. This will be helpful because the credit union will report your monthly payments to the credit bureaus.
Step #6: Keep old accounts open
Another important component of your credit score is your length of credit history. It’s made up of three components
How long accounts have been open.
How long specific account types have been open.
How long it’s been since those accounts were used.
According to FICO, its scoring formula evaluates the ages of your oldest and newest accounts, along with the average age of all of your accounts. This means if you close an old account, it will lower the average age of your accounts, which will have a negative effect on your credit score.
Step #7: Start paying all of your bills on time
Finally, and maybe this goes without saying but you need to begin paying all of your bills on time. This is the single most important thing you can do to improve your credit score.
Learn to be patient
Unfortunately, it takes much longer to rebuild your credit than it took to destroy it. While it's impossible to say how long it will take you to rebuild your credit what’s true is that it won’t happen in ln just a few months. Our best advice is that you will need to have a hefty dose of “be realistic.”