Credit Cards

What To Do If You Have Bad Credit

Having bad credit can feel like a pit that’s difficult to dig your way out of. We go over the best practices that can optimize your strategy for improving your score, as well as what things to look out for.

If your FICO is below 550, you're likely to get stuck with high interest rates, have trouble getting approved for loans and credit, and in some cases it may even impact your odds of landing a job. If that's the case, it will be in your best interest to change the status quo, and turn things around. Having a game plan can aid in speeding up the process of rebuilding your credit, and getting you back on the financial happiness track.

Focus on rebuilding your credit. The average score in the U.S. currently stands at 695 - you can treat this as a goal. One of the easiest ways to begin the rebuilding process is to open up a line of credit. Focus on paying back your debts in full and in a timely fashion whenever they are due. Though it will not happen overnight, such behavior is the only ingredient needed in fixing your credit history. Because the process takes time, it's best to start sooner than later. If you only begin re-building your credit a few months before applying for a new loan, chances are it will already be too late.

Use a secured credit card. One way to build up your FICO score is to open a secured credit card account. These cards for bad credit require users to put down a security deposit as collateral. As long as you make all your payments, this security deposit will be returned to you if you ever close your account in good standing. Secured credit cards are one of the best tools available to individuals with bad credit for rebuilding their scores. However, before opening one you should double check that they report their users to at least one of the credit bureaus -- luckily, most of the biggest credit card issuers in the U.S. do this. Also, keep in mind that these cards are generally a bad deal if you carry a balance month-to-month. It's not uncommon for these credit cards to have APRs of 22.99% or more -- significantly higher than average.

Pay off your credit card bills in full and keep credit utilization low. You don't need to carry a balance in order to build credit. One of the most pervasive credit card myths around is that you shouldn't make credit card payments in full, in order to build up your credit score. This usually gets said around a dinner table or among friends, but is a terrible piece of advice -- especially if you have bad credit. You should always pay your credit card bills in full at the end of each month. Not only does it help build up your credit score but it also prevents you from being charged interest. Secondly, paying your bill in full will help keep credit utilization low. One of the factors FICO considers when determining your score is how much of your available credit you use - this is referred to as utilization. You generally want to keep this figure below 30%.

Check for errors on your credit report. In some cases, your credit score may be low due to a mistake on your credit report. An 8-year study by the Federal Trade Commission found that one in ten people find such errors in their histories. One woman, Judith Thomas, was denied a loan she applied for due to outstanding debts to the Utah Medical Center. Not only were those debts not hers, but they were not even opened in her name, but that of a Judith Kendall. It's important to monitor one's credit history for such occurrences. You can get a copy of your credit report for free once per year through AnnualCreditReport.com -- a government operated website. If a mistake is found, consumers have the ability to report it to the credit reporting agencies - Experian, Equifax, and TransUnion.

Know that telecommunication and utility bills can have an impact. Last year, FICO announced that their plans to begin incorporating new data into the formula that generates credit scores. With this change, paying your phone, cable, electric, and gas bills will all have an impact on your credit rating. Paying your bills on time and in full will have a positive impact on your FICO score. This can be useful for individuals who cannot or do not want to open any credit accounts. Conversely, this can also hurt your credit score. If you are late on paying your phone bill, your provider may report the behavior to the credit bureaus.

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