Steps to Take When You Find Out You Have Bad Credit

Many people don’t realize they have bad credit until they get turned down for a mortgage, car loan or credit card. If you’ve had a similar rude awakening, your next step ought to be to investigate why your credit score is low.

Repairing bad credit isn’t a quick or easy process — subpar credit scores may be the result of missed payments, high balances and collection actions. But time, and a determination to break the cycle of irrational spending, can get you back on track again.

What’s a Bad Credit Score?

A FICO credit score, which is used by the majority of financial institutions, can range between 300 and 850. The average FICO score hit an all-time high of 704 in April 2018, but a score of 669 or below — which more than a third of consumers have, according to Experian — can be considered fair or subprime credit.

[Read: The Best Credit Cards for Bad Credit of 2018.]

“It’s tough to pinpoint when a credit score goes from respectable to dangerously low,” says John Ulzheimer, president of The Ulzheimer Group and a national expert on credit who formerly worked with Equifax and FICO. For example, if you don’t want to buy a house or car, you can likely deal with a lower credit rating than someone who is saving up for a $500,000 home.

Factors that can contribute to bad credit include the length of credit history, type of credit, amount of new credit, late or missing payments, and maxing out credit cards, says Emily Holbrook, director of personal markets at Northwestern Mutual.

If your credit score is closer to the 300 mark, your concerns may be larger than qualifying for a mortgage or any other major loan.

Landlords are less likely to rent to you, and employers are less likely to hire you if you have dangerously low credit ratings, says Julie Kalkowski, executive director of the Financial Hope Collaborative at Creighton University, which is a financial education and counseling program for low- to moderate-income families living in Omaha, Nebraska. In fact, one of Kalkowski’s clients with poor credit was fired after her employer pulled a credit report.

“It has real consequences,” Kalkowski says. “It really limits your life and opportunities. You end up paying excessive interest rates” in part because you’re more likely to go to fringe financial service providers instead of traditional lenders, such as credit unions or banks.

The stronger your credit score, the more financial freedom you’ll have obtaining credit products at the lowest possible interest rate.

Researching Your Credit Score

If you’re not sure what your credit score is, or if you need to monitor it more frequently, there are plenty of places to look. For example, many credit card companies will give you your credit score for free, as will several websites approved by the three major credit reporting agencies.

The score is a direct byproduct of your credit report. Unless you’re a victim of fraud or have incorrect information on your credit report, there is no mystery about why you have bad credit — you failed to live up to the expectations of your creditors.

“If I were to tell you you’re a 720, who cares? What’s more important is the basis for the 720,” Ulzheimer says. “You don’t have control over the score, but you do have control over the information on the credit report. All credit score management entails is managing the information on your credit report.”

Your first step once you find out you have a low credit score is to obtain and evaluate your free annual credit reports.

When you visit AnnualCreditReport.com or call 877-FACT-ACT (877-322-8228), you can order reports from each of the three major credit reporting agencies right away to get a baseline of where you stand with all of them. Or, you can request one immediately and stagger the others over the rest of the year to see how your reports might change.

[Read: The Best Secured Credit Cards of 2018.]

Once you get your report, review it to make sure it’s an accurate representation of your credit history, Holbrook says.

Believe it or not, mistakes can happen, and some can be very costly.

For example, one of Kalkowski’s clients found that her credit report included negative credit information from an older woman in her town who had her same first and last name, but with a different middle initial. Kalkowski’s client was able to clear up the confusion, in part, because she explained she was in seventh grade when some of the negative financial transactions took place.

“It took 16 to 18 months, and her credit score went way up” after the mistake was corrected, Kalkowski says. But she wouldn’t have known about it without checking her credit report.

First Steps to Address Bad Credit

When you’re evaluating your credit and budgeting to pay off your debt, it’s best to be as logical and unemotional as possible, Holbrook says. “You want to make sure you’re addressing the debt,” but not forgetting that you need to contribute to your savings and retirement plans as well.

You also need to consider what action will improve your credit score and how quickly it might happen. “There are a lot of paths to a lower score,” Ulzheimer says. “We don’t all have a 650 for the same reason.”

For example, if you have several debts that went into collection, that negative information could stay on the credit report for seven years, even if you settle the debt with the collection agency, Ulzheimer says. Although you may improve your score by paying off collection accounts, the accounts will still remain on your credit report as a negative item after being paid off.

Fortunately, there are several steps you can take to improve your credit history or, at least, strengthen your financial position:

Lowering your balances: Credit card companies don’t like to see high balances on credit cards in proportion to the credit line. The credit utilization rate is one of the most influential factors in your credit score. Using more than 30 percent of your credit line can raise warning flags.

Diversifying credit: Getting another credit card or, if you’ve only used credit cards, obtaining an installment loan could help consumers who have yet to build up a deep and diverse portfolio of credit.

Using credit-positive vehicles: A credit-builder loan or secured credit card used responsibly can quickly put positive credit information on your report.

Getting late payments removed: You might also be able to negotiate with the credit card company to see if it can remove penalties such as late fees.

Managing debt: Consider applying for low or zero annual percentage rate credit cards to transfer some of your high-interest debt. Credit consolidation loans that can put the debt in one place with a lower interest rate might be helpful. For serious debt, credit counseling, debt settlement or bankruptcy might be worth considering. For example, a debt management plan with a nonprofit credit counselor can help you budget for debt payments as well as negotiate with and pay creditors on your behalf. But keep in mind that debt settlement and bankruptcy may have a negative effect on your credit.

Maintaining Good Credit Progress

Once you’ve made positive traction toward a higher credit score, it’s important to avoid common mistakes that can knock it down again. Some steps that could help:

— Avoid closing credit card accounts because that can decrease the overall age of your credit accounts. The goal is to have a long history of good credit accounts.

— Continue to watch your credit reports so you can detect and challenge any errors that might appear.

— Since your payment history is usually the most important factor in determining your credit score, be sure to make all of your payments on time.

— If you’re applying for installment loans — such as a car loan — make sure you submit all applications in a 30-day period so FICO will count it as just one credit inquiry.

It’s also important to stick to best practices to improve your score instead of taking drastic action that won’t really move the needle. For example, Ulzheimer says he met a person who wanted a high credit score but instead of paying off his large amount of credit card debt — the primary reason his score was low — he took out a 401(k) loan to pay off his truck. Even so, his credit score didn’t go up nearly as much as he had hoped.

If he took the same money and paid off his credit card debt, “his scores would have shot through the roof,” Ulzheimer says.

[Read: The Best Starter Cards for Building Your Credit.]

Practice Good Financial Habits for Positive Credit

All consumers have the ability to improve their credit score, and exhibiting stronger spending discipline is the key to any plan.

Kalkowski says she often asks her clients to question purchases: “‘Do I need this? Do I want this? Am I buying it because it’s on sale? Will I use it? How many hours will I have to work to pay for this?’ A lot of times, the item goes back on the shelf,” she says.

Over time, these financial best practices will translate into long-term credit score success, rewarded by lower interest rates, which let you pay less to borrow.

“If you pay your bills on time and stay out of credit card debt, you’ll have a good credit score whether you want it or not” and it’s one less thing you’ll have to worry about, Ulzheimer says.

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Steps to Take When You Find Out You Have Bad Credit originally appeared on usnews.com