You’ve been denied a bank loan because your credit score is low. Or you’ve been issued a new credit card. But the APR is higher than you expected. You call the card issuer to find out why, and you’re told it’s because your credit score is low.
Both are bad news. But in time, you can repair your credit. Here are 7 steps to get you started.
1. Learn your Credit score
Start by getting your credit report and credit score.
The website AnnualCreditReport.com enables you to get a free credit report once a year. Take advantage of the freebie, because if nothing else, you might find a credit report error. But heads up: The report doesn’t include your credit score.
It’s easy—and can be free—to get your credit score. Discover provides your FICO score free, whether you’re a customer or not. Also, your bank, credit union or other financial institution may provide your credit score as well, also for free. Scores are typically updated once a month. Don’t worry: Receiving your credit score won’t hurt your credit rating.
2. Dispute errors in your credit report
By obtaining a copy of your credit report, you might discover something that’s incomplete, incorrect, or missing. If so, make correcting the errors a top priority.
The credit report you receive should include instructions on how to dispute errors online, by phone or via mail. Disputing online or by phone is faster. But filing a dispute via certified mail with return receipt requested provides hard-copy proof, which you might need later.
The Federal Trade Commission offers detailed steps on how to dispute a credit report error.
3. Understand what’s affecting your Credit score
Usually, you’ll receive an explanation of the key factors that affect your credit score. Read it carefully, as it can serve as a roadmap to fixing your score.
For example, a frequently cited factor is when the proportion of credit balances to credit limits is too high. Say you have three credit cards, each with a limit of $5,000, and you owe $4,500 on each card. In that scenario, your account balances in relation to your available credit are too high. That imbalance can drag down your credit score.
4. Pay off cards with the highest APR first
If having multiple credit accounts with high balances has lowered your credit score, it’s time to start paying balances down. Start with the card with the highest APR. Once it’s paid off, focus on paying off the card with the second-highest balance. An added bonus is that you’ll have one less monthly bill to pay.
5. Make multiple small payments to pay down a balance
Maybe money is tight. But you still want to pay off one of your credit accounts. Consider making multiple, automatic small credit card payments, in addition to your monthly minimum payment.
Let’s say your credit card’s minimum monthly payment is $75. To get ahead of the game, set up an automatic online payment to that credit card account of $10, $15 or another amount every week. You may not even notice the money’s gone from your checking account. And those extra payments will add up over time.
Another option is to set up a separate savings account with your bank, specifically for the purpose of paying down a credit card balance. Every week, automatically transfer money to the savings account. When your credit card payment comes due, you’ll have set aside extra money to pay down the balance as well as pay the monthly minimum. Plus, if something unexpected comes up, you’ll have some savings to use—instead of having to rely on credit.
6. Paid off a credit card? Don’t close the account
When you’ve paid off a credit card, you might feel like closing that account—so you won’t be tempted to use the card again.
But, as mentioned in step no. 3, your credit score can be negatively impacted when the balance of credit account total charges and available credit is too high. So when you close a credit account, your total available credit drops.
The previous example of three credit cards, each with an available limit of $5,000, means you have a total available credit limit of $15,000. But if you close one of those accounts, suddenly, your total available credit is only $10,000. And if you owe $4,500 on the two remaining cards, the ratio of your available credit and your card balances is still too high.
The age of your credit history is a small but meaningful factor on your credit score. If your oldest credit card account dates back 20 years and you close it, it could negatively impact your score.
Of course, many credit cards charge an annual fee. You’ll need to decide if paying that fee for a card you won’t be using anymore is worth it. One option: See if your credit card company can switch you to a card with no annual fee.
Also, if you’re worried you’ll be tempted to use the card you just paid off, cut the card up. Delete it from any place on your computer—such as your web browser—where it’s stored. Also remove it from online retail accounts, like Amazon. In short: Put in your way as many obstacles to using the paid-off card as possible.
7. Be diligent but patient
Keep at it. Pay your bills on time, either by automating the payments or setting up multiple calendar reminders.
Be patient with the process—and with yourself, too. You may need to overcome years of counterproductive spending habits, and that’s not going to happen overnight.