We all make mistakes in life.
Sometimes, the decisions we make, especially where finances are concerned, can snowball out of control.
Credit is one such area where, if you're not careful, you can end up being denied loans, credit cards, and more.
The problem is, there's no high school or college course called Credit Cards 101 that teaches you about good financial habits and proper credit management.
It's incredibly easy and tempting to simply be approved for a card, start spending, and think you'll deal with it later.
If later is where you are now and you're staring at a lackluster credit score, it can feel hopeless.
But your credit score is like a road.
What do you do when you've been driving the wrong direction all this time?
Simple — you turn around.
But even better — you get a map.
There's precious little information out there that tells you, in a step-by-step way, how to course-correct when it comes to repairing your credit and increasing your credit score.
The good news is that by reading this guide and implementing these tips, you can start making measurable increases to your credit score.
Not only that, but you can also save thousands of dollars in the process on credit cards, loans, and even your mortgage.
Here at CreditLoan, we've helped thousands of people repair and improve their credit.
We've even analyzed over 10 million credit scores to learn more about how finance really works.
With this in mind, we're delighted to present this guide as an optimal, "mistake-free" map that you can follow to get you that coveted excellent credit score.
If you have poor credit now, no credit at all, or even if you've tried to boost your score before, with this step-by-step guide, you'll be able to get on the path to excellent credit.
Just know that this is going to take some time, so don't try to do it all at once.
Complete each step and move on to the next one.
Each time, you'll be taking concrete, actionable steps to improve your credit — sometimes by as much as 100 points or more.
What could a 100 point increase do for your ability to get approved for loans or credit cards?
Let's get started.
Step 1: Check your credit score for errors and dispute them
Start by learning what your credit score is
The very first step in your credit repair journey is to get a copy of your credit report.
To do this simply go to AnnualCreditReport.com and request a report.
I've reviewed all of their credit monitoring services and my feeling is that they are just not worth it.
You can get your credit score more than 1x a year. You don't have to request all three credit reports all at one time.
You can space them out by requesting one from each bureau every four months.
This way, you can actually see your credit score improve over time.
And that's a great feeling.
But in requesting your credit score, there's one major pitfall to avoid:
Don't fall prey to the "free credit report" scams
Many a company will offer you a "free credit report" if you just sign up for its credit monitoring service or some other catch.
Only AnnualCreditReport.com is the direct, legitimate site to request your credit report from the three major credit bureaus without having to sign up for anything.
You don't even need a credit monitoring service because, thanks to the tips you'll learn in this guide, you'll be the one doing the monitoring.
And that alone can save you hundreds of dollars per year over having some no-name company offer to do it for you.
The hack over at Equifax was awful. If you haven't already, be sure to read 9 Ways to Protect Yourself After the Equifax Breach.
You can fix your credit score with ZERO mistakes — but you must start today
The process of improving and repairing your credit won't happen overnight.
By following these steps, you'll steadily work your way towards being debt free and improve your credit score in the process.
So what's the difference between a credit report and a credit score? It's simple.
Your credit report contains all of the data that's used to calculate your credit score.
However, in the course of calculating all that information, mistakes can happen, which brings up our first step.
The FTC reported that up to 21% of customers have errors on at least one of their credit reports.
That's nearly a quarter of the American public that could be dealing with potentially lower credit scores (and paying more in terms of interest and fees) because of a simple error.
Here are some of the most common credit report mistakes to look for:
Incorrect personal identity information can cause big headaches. This can include errors in your personal identity, such as an incorrect name, phone number, or address.
Another common mistake is having your credit report (and thus, your score) mixed up with someone else who has the same or similar name. This is known as a "mixed file."
It's also possible to have incorrect account information if you've ever had your identity stolen.
An incorrect account status will take your score down. This type of common mistake covers all kinds of account information, including issues where closed accounts are marked as open.
Too many open accounts can cause your credit score to take a hit.
Another common issue is where you are reported as an account owner even though you're just an authorized user.
This means the transactions done by the account owner can mistakenly be attributed to you.
Sometimes, it can simply be clerical errors such as an incorrect last payment date, an incorrect date for when the account was opened, or an incorrect date when a payment was made delinquent.
In some cases, accounts that are in good standing can be mistakenly marked as delinquent or late.
In other cases, the same debt can be listed several times, possibly under different names.
If you are getting divorced, remove your name from any joint accounts so you won't be liable for your ex's future debts.
Check your credit report after the divorce is finalized to make sure none of these new debts crop up on your record.
Data management errors related to troublesome accounts will set you back. If you have delinquent accounts or accounts that are in collections (whether mistakenly or not), this can contribute to data management errors.
For instance, accounts can appear several times with different creditors listed.
Bad debts over seven years old should be removed by credit reporting companies as well, but this doesn't always happen as it should.
If you've filed for bankruptcy in the past, the discharged debts shouldn't appear on your report either, although the bankruptcy will.
Other common data management errors can cause incorrect information to be re-inserted even after you've taken steps to correct it!
This is why it's so important to request a copy of your credit report from the different bureaus throughout the year to try and avoid issues like these.
Incorrect account balances are easy to fix if you find any. Sometimes you'll see an incorrect account balance or accounts that have an incorrect credit limit.
This can make it look like you have more debt or open credit than you actually do, which can, in turn, affect your score.
Accounts "closed by grantor" means you probably have ammo for a dispute. This is a little-known but very important area to check under your credit accounts.
If you closed a credit card, make sure that your report does not show "closed by grantor."
This means that the credit card company closed your account instead of you, which can negatively affect your score.
All of these reasons are why it's so vital that you look over your credit report completely and dispute any items that are incorrect.
In the next step, we'll see precisely how to do just that.
What if my credit report doesn't have any errors?
If you haven't found any errors on your credit report, that's great!
However, it's still a good idea to request your annual credit report to be ahead of the curve.
As you might know, various life changes (like getting a mortgage or a car loan) or incidents (like identity theft or divorce) can affect your credit if left unchecked.
One of the most important aspects of your credit report is your credit score.
Here's how to find out what that all-important number means.
Get Your Free Credit Score!
- Knowing your credit score is the first step towards lower interest rates and higher approvals
- Full report from Equifax®, Experian® and TransUnion®
- Find and prevent identity theft by understanding your credit history
Step 2: Don't Hesitate to Dispute Items
Here's how to dispute items with the three major credit bureaus
In disputing an item, you'll need to write to the credit reporting agency (Equifax, TransUnion, or Experian) and tell them that you are disputing one or more items in your credit report.
Here is what you'll want to include in your letter:
- The information you believe is inaccurate
- Copies (not originals) of any documents that support your position
- Your complete name
- Your address
- Why you dispute the information
- A request that it be removed or corrected
You'll then want to send your letter via certified mail with a "return receipt requested."
This helps ensure that the credit reporting bureau received your dispute. Keep copies of the letter you sent and any items you enclosed.
It's highly encouraged to send your dispute by mail and not call or email. Here are the addresses of the three major reporting bureaus.
Experian National Consumer Assistance Center
P.O. Box 4500
Allen, TX 75013
TransUnion Consumer Relations
P.O. Box 2000
Chester, PA 19016-2000
Equifax Credit Information Services, LLC
P.O. Box 740241
Atlanta, GA 30374
The credit reporting company must then investigate your dispute, generally within 30 days.
If a company shared your financial information with the credit bureau, it too must investigate and report the results back.
If it's found that the dispute is warranted and accurate, all three credit reporting companies must be notified so that the mistake can be fixed.
After all of this happens, the credit reporting company sends you the results in writing.
If the corrected dispute leads to a change in your credit score, the company also gives you a free copy of the report as well.
This does not count toward the same yearly copy you're normally allocated.
Step 3: Understand What Contributes to Your FICO Score
A FICO score is a type of credit score, and it is the most relied-upon by the major credit reporting bureaus and lenders.
Throughout this guide, you may see the terms FICO score and credit score used interchangeably.
Knowing what actions contribute to improving and what actions detract from your FICO score is important to improving your credit with zero mistakes.
If you can focus on the big things that raise your score, which we've detailed below, you can make a measurable impact to increase it.
Watch out for "fakeos"
There are other types of credit scores as well, most commonly known as "fakeos" by those in the credit reporting industry.
Generally speaking, these types of scores, which go by names like "Plus Score," "TransRisk," "Equifax credit score," are only used by credit monitoring services and not by any lenders.
Only the "Vantage" score is used by a small number of lenders.
The FICO score is used considerably more and is really the only score worth concentrating on.
Now, with this in mind — what really contributes to that number that you see on your credit report?
35% of your FICO score is based on your payment history. How timely were your payments? Did you pay off your balance each time or only pay the minimum?
Ideally, you should pay off your balance entirely, but if you can't, paying more than the minimum will help you steadily nibble away at your debt and steadily increase your credit score.
30% of your FICO score is based on how much you owe. Carrying a lot of debt across several credit cards or owing nearly as much as your credit limit allows can cause your score to drop.
Work on tackling your biggest debt first, and then after it is paid off, use the amount of money you'd ordinarily put toward that big debt toward the next-biggest debt — a process known as the "snowball effect."
Over time, this will not only help you pay down high debt but will increase your credit score as well.
15% of your FICO score is based on the length of your credit history. Opening lots of credit cards or canceling them as soon as you pay them off (which sounds like a great idea in theory, but really isn't) can affect your FICO score.
It's better to have fewer cards and keep the accounts open longer.
This helps you build a more established history and helps give lenders peace of mind when considering your application.
And although the percentage of your FICO score isn't as large as how much you owe or your payment history, it's still worth keeping your oldest accounts open with little or no balance to build your creditworthiness
10% of your FICO score deals with new credit. Did you recently apply for a car loan? A mortgage? A credit card? This is noted on your credit report and contributes minimally to your FICO score.
10% of your FICO score is based on the types of credit you use. Credit cards are not the only way to build your score. Having a variety of loans, from car loans to a mortgage, can diversify your credit portfolio and boost your score.
How secured and unsecured credit contribute to your credit score
Unsecured credit is credit that has no collateral behind it. It's like telling the bank or lender "trust me with some of your money. I'll pay it back."
The bank or lender might answer "Yeah? Prove it."
By looking at your credit history, the lender is looking at past "proof" that you paid your debts on time and in full, or at the very least, that you are making progress on it.
Credit cards are a type of unsecured credit. The credit card company can do a preliminary check of your credit report and score to determine what kind of borrower you are.
This, in turn, affects your interest rate and credit limit.
Your credit report is a type of "fail-safe" for the lender. Could you still default on your credit card and not pay the balance?
You could (though it's strongly recommended that you not do this)!
The lender is hoping that you're honest and responsible enough not to do that and uses your credit report as a kind of "fail-safe" method to help with the decision.
Secured credit is backed by some form of collateral. Think your home or your car, typically, though valuable jewelry or other rare objects are also possible.
As an example, a home equity line of credit is a type of credit that uses the equity you've built up over time by paying your mortgage.
You can even get secured credit cards which work like prepaid cards, in that you load a certain balance on them and that becomes your credit limit.
Now that you know the most important factors that contribute to your credit score, you'll notice that the biggest chunks are your payment history and how much you owe.
Therefore, it's important that you tackle those first.
And with this guide, that's precisely what we're going to do.
Step 4: Put Your Cards on Auto-pay
Set your cards to auto-pay and then leave them alone!
Whether you use an old-fashioned calendar for this next step or you set up an alert on your cell phone doesn't matter.
Do whatever you need to remind yourself when credit card payments are due and pay them.
Pay as much as you can on your cards, consistently. Since the biggest contributors to your credit score are the amount you owe and your payment history, you'll want to pay as much as you reasonably can toward your cards on a regular basis.
Take advantage of technology to pay down your debts. Most credit card companies make this process incredibly simple by letting you enroll in auto-pay. This lets you connect your bank account to your credit card, with an amount you determine taken out each month.
Make additional payments if you can afford it. Don't wait for the company to mail you a statement. With most credit cards, you can even make additional payments online if you'd like (and this is recommended to pay down your balance faster!).
But taking this step toward repairing bad credit also means that you have to leave your credit cards alone!
Do not use them as a crutch to take on more credit card debt, or worse, use one credit card to pay down another.
This simply begets a cycle of debt that can eat your finances alive and wreck your credit score if it's not handled properly.
In time, this can also mean not being approved for a mortgage, a car loan, or any credit card.
You don't want that kind of future for yourself or your family, so getting a handle on your debt today rather than letting it build and fester is a smart step toward reclaiming your financial independence.
Step 5: Tackle the Biggest First
Pay off your largest debts first and pay more than the minimum
The next step toward improving your credit score is to decide how you want to pay down your debt.
We recommend tackling the largest debts first.
Although it may seem easier to pay down the smaller credit cards first, here's why you don't want to do that yet:
Understanding what revolving debt is and how it works. A big part of your credit score is based on your revolving debt (that's part of the 30% of how much you owe).
Your revolving debt is debt that's hanging around on credit cards that aren't paid off yet. The smaller this number is, the better.
Keep your credit card balance smaller than your available credit. Ideally, you want to keep your credit card balance under 30% of whatever your available credit limit is.
To really improve your credit, keep it at 10% or less. That means if you have a credit limit of $1,000, you'd only keep a $100 balance on the card.
Step 6: Don't Be Late!
Avoid and/or contest missed payments so they don't ding your credit score
Missing a payment (and being subject to things like penalty interest) doesn't happen if you have things like auto-payments and reminders in place, which you should have set up in step 3.
But we get it — mistakes happen.
Maybe you suddenly find yourself unemployed and simply unable to make that credit card payment.
In this case, the last thing you want to do is stop making payments. Here's what you do.
Call up the credit card company – explain your situation briefly.
Ask them politely to remove the missed payment flag from your account.
You have 30 days from the due date before the company can report that late payment to the credit bureaus.
But don't wait until the last minute.
As soon as you can start paying again, do so immediately. And always pay more than the minimum balance.
This helps you avoid huge interest charges and also helps you make measurable progress toward paying down your balance.
Taking these steps will help you begin to make a serious dent in your debt and improve your credit history.
There's more you can do to improve your credit score
Taking these steps won't improve your credit immediately, but if you work on each one, then you will see it steadily grow higher over time, as long as you continue to pay down your debts and make your payments on time.
But if you're looking to rebuild your score and you're having trouble even getting approved for a credit card, what can you do?
There are options for people with poor or no credit history:
Get a secured credit card. As we explained above, a secured credit card is one where some type of collateral — in this case, a pre-paid amount (usually around $300-500) is put on the card.
This becomes your credit limit. You then receive a card with that amount on it.
The difference between a secured credit card and simply loading a prepaid card is that a prepaid card will likely have an annual fee and an application fee.
It's possible to find a secured card with no application fee and a low annual fee, however, so you can start to make meaningful progress on improving your credit.
I've reviewed the best secured credit cards for those with bad credit, so take a look!
Get a personal loan. You may qualify for a personal loan of up to $5,000, which, when paid back promptly, can help you establish a good credit history.
There are even bad credit personal loans available, as well as a calculator that can tell you up-front how much your total cost would be, so you'll know precisely how much you'll need to pay back.
Get a credit builder loan. A credit builder loan from a local bank or credit union works a little differently than many other types of loans.
With this kind of loan, you don't get access to the funds right away.
Instead, the bank or credit union puts it in an interest-bearing account while you make monthly payments on the balance.
Once you pay off the balance, you get the cash and the interest, as well as a couple years' worth of reliable payment history to show on your credit report.
Become an authorized user of someone else's account. We recommend this avenue only if you and the person you're sharing the account with are responsible for their finances.
When you do this, your name becomes attached to their account, so both of your credit histories with that account are tied together.
If they mess up their credit, both of you will feel the pain when it's reflected in your respective credit reports.
Don't close an old account after you've paid off the card. We understand the thrill of celebration when you cut up an old credit card and throw the pieces in the air like confetti.
Except you shouldn't do that. Even after you've paid off the card, keep the account open.
Remember that your credit history plays a big role in your credit score.
Keeping older accounts open longer (even if you don't have a balance on them) demonstrates to lenders that you have a solid track record of making reliable payments on time, long-term.
Even closed accounts can show up on your credit report and be factored into your score, so it doesn't hurt to leave that gold star there for lenders to see!
Start with one step and see the positive results
Understanding how credit scores work is just the first step in raising your score and securing your financial future.
By following these steps, you won't repair your credit in a day, but you will make real, meaningful and measurable progress toward fixing a poor credit score.
Using this guide will also help you to develop better financial management and good credit habits, all of which will contribute to helping you keep that excellent score well into the future.
Have you successfully improved your credit score?
How was the process for you overall?
Any suggestions or pitfalls to share with the rest of us?
Let us know in the comments below.