Avoid Bad Credit

Your credit is an important part of your financial history. Lenders use your credit score to determine whether you qualify for a loan. Landlords may use your credit score to determine if you will make a good tenant. In order to secure a bright financial future, it is important that you take steps to avoid having bad credit.

Steps

Maintaining a Good Credit Score

  1. Pay bills on time. One of the most effective ways to avoid bad credit is to pay your bills on time. There are many reporting and monitoring agencies that alert the credit bureaus if you are late or delinquent on any payment. Late payments can cause your credit score to drop.[1]
    • It is important to pay each of your bills on time. This includes credit card bills, rent, utilities, and even cable and cell phone bills.
    • Paying your bills at the same time each month can help you remember to pay them on time. For example, each time you get paid, take time to sit down and make payments.
    • Keep track of due dates by noting them in your calendar. You can even use technology by setting reminders to help you remember each payment date.
  2. Avoid maxing out credit ratios. Using credit responsibly can be a good way to build your credit score. However, hitting the limit on any of your credit lines will lower your score. You should also avoid maintaining large balances on any of your cards.[1] In addition, avoid creating a high debt-to-income ratio. This ratio measures your income to the amount you pay in debt payments each month. A high ratio (over one third of your income going to debt each month) can make you less creditworthy.
    • Try to keep your credit card balance under 20% of your credit limit.
  3. Build up your credit history. Having no credit can be almost as detrimental as having bad credit. You must actively take steps to build good credit. To do this, you need to have accounts and credit cards in your name.[2]
    • Consider getting a secured credit card. Secured cards allow you to deposit an amount into an account and then you can charge up to that amount.
    • Ask for a credit limit increase. You don't need to spend more, but a higher amount will help your debt-credit ratio. A lower ratio of credit utilization (how much of your credit line you are using) can help raise your credit score.
  4. Protect your identity. If your identity is stolen, your credit is at risk. Identity thieves can use your information to make fraudulent charges that can wreck your credit. Although identity theft can happen to anyone, you can take some steps to help prevent it from happening to you.[3]
    • Protect your personal information. Keep financial documents and important items such as your social security card locked in a safe.
    • Do not share passwords. For all of your online transactions, make sure that you are the only one who can access your accounts. Change your passwords regularly.
    • Use security software on all of your electronic devices.

Repairing Your Credit Score

  1. Set a goal of raising your credit score. One way to have "good credit" is to have a high credit score. Your credit score is a number used to tell lenders, potential employers, landlords and others what kind of financial risk factor you have. Many lenders rely on FICO credit scores for this number. FICO stands for the Fair Issac Corporation, which is the company most relied upon to calculate credit scores.[4]
    • Credit scores can range from 300-850. The higher the number, the better. There is no set number for what defines "good" credit. Some lenders consider 650 good, while others go a bit higher or lower.
    • There are three credit bureaus that keep files on your finances and release credit scores: Equifax, TransUnion, and Experian. You can get your credit score from these companies through their websites for a small fee.
    • Your credit card, bank, or websites like Credit Karma or Credit Sesame may be able to provide you with your credit score for free.
    • Your credit score will fluctuate over time, based on five factors: amount owed, new credit, length of credit history, credit mix, and payment history.
  2. Catch up with delinquent debts. If you have any late payments or delinquent debts on your credit history, this is likely negatively impacting your credit score. Contact the lender to work out a repayment plan so that you can eventually have the bad debt removed from your credit report. When paying off debt, start with the debt with the highest interest rate and then, once that is paid, move on to the debt with the next highest rate. This can help you avoid accruing additional interest debt while you work to repay your debts.[5]
  3. Remove mistakes on your credit report. Get a copy of your credit report by visiting annualcreditreport.com. This report is free to obtain once per year. When you have your copy, check over it closely to see if there are any misreported or duplicated debts on your credit report. If so, contact the credit reporting agency (Experian, TransUnion, or Equifax) and go through their error disputing process. If they cannot remove the debt, you may have to contact the lender listed on your report and have them change it. Removing these types of errors can dramatically improve your credit score.[6]
  4. Avoid opening new credit lines. In general, you should avoid applying for new credit frequently. Applying for new credit cards or other types of credit can have a negative impact on your credit score if you do so frequently. If you need more credit to make a purchase, ask for a credit increase on a current card instead.
    • However, if you only have one or two open credit lines, opening others can help decrease your credit utilization ratio, which can improve your credit score.[1]
  5. Visit a credit counselor. If you feel like you are unable to fix your credit on your own, help is available. You can visit a credit counselor. Most credit counseling services are non-profit, and you can receive advice in person, over the phone, or online.[7]
    • Credit counselors can help you figure out a debt management plan, and also help you create a workable budget.
    • When you contact the office, ask what kind of services they provide and what qualifications the counselors have.
  6. Be patient. A bad credit score can be a major setback in achieving your financial goals. However, you can take steps to repair your credit. Just be aware that there is not a fast, simple way to raise your score.[8]
    • It can take several months, and even years, to raise your credit score. You need to pay all of your bills on time and demonstrate your financial responsibility.
    • Be honest. Do not try to hide your poor credit from potential landlords, lenders, or employers. Instead, honestly and openly explain your circumstances.[9]

Building Good Credit

  1. Understand the difference between a good credit score and good credit. Good credit a reflection of your ability to pay bills on time and manage your finances. It incorporates your payment history, a measurement of your income, and other factors that show that you are financially responsible. A credit score, on the other hand, is a numerical representation of your history of repaying debt. You can have good credit without having a credit score at all by avoiding debt completely. Improve your credit by being responsible with your payments and your financial life.[10]
  2. Create a payment history. You'll need to show lenders that you can responsibly pay bills. Try putting some household items in your name. Paying the electric or cable bills on time can help you establish credit.
  3. Avoid certain loans. Sometimes a loan can help your credit. Examples of "good" loans are mortgage or car loans from a reputable lender, such as your bank. However, there are many types of loans that can be detrimental to your credit.[11]
    • Payday loans should be avoided at all costs. These loans, which are granted to anyone with proof of income, can have exorbitant interest rates.
    • Auto-tile loans are usually not a good idea, because the rates on these are usually high. You are also putting yourself in a situation where you might have to forfeit your car.
    • Certain car loans can also be very bad deals. If the interest is in double digits, or it will take you more than 5 years to pay back the loan, it is not a good loan.
  4. Build your job history. Lenders look for several factors when deciding what type of loan they will grant you. One thing lenders look for is that you have a history of reliable income. You will often get a better loan rate if you can show that you have worked at the same job for a number of years.[12]
    • A solid job history can help you get loans and higher credit amounts on your cards.

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Tips

  • Seek advice from a credit counselor if you have questions.
  • Communicate with your partner about joint financial issues.

Sources and Citations

  1. ↑ 1.0 1.1 1.2 http://www.badcredit.org/how-to-avoid-a-bad-credit-score/
  2. ↑ http://www.discovernetwork.com/consumers/credit-management/establishing-credit.html
  3. ↑ https://www.consumer.ftc.gov/topics/identity-theft
  4. ↑ http://www.myfico.com/crediteducation/creditscores.aspx
  5. ↑ https://www.creditsesame.com/blog/will-paying-off-delinquent-debts-improve-my-credit-score/
  6. ↑ https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports
  7. ↑ https://www.consumer.ftc.gov/articles/0153-choosing-credit-counselor
  8. ↑ http://money.usnews.com/money/personal-finance/articles/2015/06/23/10-simple-ways-to-raise-your-credit-score
  9. ↑ http://www.creditcards.com/credit-card-news/bad-credit-stereotype-game-plan-1265.php
  10. ↑ https://www.whatsmyscore.org/break/reportvsscore.php
  11. ↑ http://money.usnews.com/money/personal-finance/articles/2014/07/15/5-types-of-bad-credit-loans-to-avoid
  12. ↑ http://amtrustsolutions.com/how-to-avoid-bad-credit/
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