What we’ll cover:
Good credit scores don’t just happen. They’re made.
If you don’t have good credit, there’s an opportunity to do something about it (we like to look on the positive side of things).
We’ll outline some steps you can take to help fix your credit score, aka repair your credit. But first, let’s talk about credit scores in general.
Credit scores are essentially your debt report card. Here’s how it works:
Lenders and creditors you’ve borrowed money from share information with the three major credit bureaus about what it was like to work with you. The bureaus then turn this information into credit scores and reports. These scores and reports become important indicators to help other lenders determine if you’re going to pay them back on time.
There are two main credit scores: FICO Score and VantageScore.
Both grade borrowers using scales that run from 300 to 850. The difference comes down to who does the calculating and how they label different scores. Here’s a quick overview.
The Fair Isaac Corporation puts together the FICO Score, which has five categories:
The three credit bureaus – TransUnion, Equifax and Experian -- put together VantageScore, which also has five categories:
A poor credit score can make life a little harder. When you apply for new credit, you may get stuck with fees or a higher interest rate, or you may be denied new credit entirely. Depending on where you live, you may pay more for car insurance for having poor credit.
These are just a few reasons you may have a poor to very poor credit score:
While it may seem counterintuitive, you actually don’t want to come close to using all of your available credit. In fact, you should aim to use no more than 30% of the limit on your credit card account. So for a card with a $10,000 limit, you should only be using $3,000.
If you're on top of your bills and don’t max out your credit limits, but still have a low score, consider this question: What’s in your credit history?
Bankruptcy? Foreclosures? Late payments? Think these are over and done with? Think again.
This is about how long you can expect these things to show up on your credit report:
A note about late payments: These can only be reported on your credit report when the payment is more than 30 days late.
When you pay on time – the full amount or at least the minimum amount due – lenders are happy. You’re showing them that you’re a reliable borrower.
When you pay late, not so much. Not only can it impact your credit score (if it’s more than 30 days late), but it could inflict additional financial pain. You could end up paying a late fee, and in addition to any interest you may owe, your interest rate may increase.
Repairing credit requires patience and diligence. Not terribly exciting, we know. But repairing a low credit score is possible, and that's the key.
Here's a short list that can help you improve your credit score sooner rather than later:
Because part of your credit score depends on how close you are to maxing out your credit lines, shutting down credit cards may not help you improve your credit score. When you close credit cards, you reduce your available credit.
At the same time, we get it if having fewer credit cards means you’re less tempted to spend. If you really want to close some credit cards, here are some things to consider:
Credit repair sounds like a great service, but it also comes with a cost. According to the FTC, “anything a credit repair company can do legally, you can do for yourself at little or no cost.”
If you’re determined to use a credit repair service to improve your credit score, be cautious about the service you choose. The Consumer Financial Protection Bureau highlights warning signs that a credit repair service may be a scam. Red flags include any service that: pressures you to pay up-front fees; promises to remove negative information from your credit report; refuses or avoids explaining your rights; tells you not to contact credit reporting companies.
Still, sometimes it’s nice to have some help. If you want to use a reputable credit repair service, the Department of Justice has a list of approved credit counseling agencies.
If you’ve fixed your credit score – Congratulations! Now it’s time to maintain your credit.
Everything you just did – paying on time, not maxing out your credit lines, taking on credit only when you need it and watching your credit reports – is what you need to do keep a high credit score.
So remain persistent. And pat yourself on the back from time to time. You deserve it.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.