Having poor credit can be stressful.
Especially if you are applying for a mortgage, auto loan or other big purchase. Before you can fix any problem, you need to determine the root cause. The tough part with credit is that there are several factors that make up your credit score, and it takes a while for changes to be reflected with the credit bureaus. The good news is that you can take steps to improve your credit and work towards healthier credit habits. And, Peapack-Gladstone Bank is here to help you every step of the way. Let’s explore what makes up your credit score, and how you can fix your bad credit through a five-step plan.
Credit Score Criteria
Before you can learn how to fix your credit, it’s helpful to understand what makes up a credit score. Many banks and credit unions use FICO Scores to determine your creditworthiness. This score is derived from three different credit reporting agencies, Experian, Equifax and Transunion, who all collect data on you throughout your life. FICO then assigns each person a score between 300 and 850. Not all credit scores are FICO scores, but since it’s widely used, let’s start with a breakdown of how a FICO score is calculated:
- Payment History = 35% of score
- Amount owed = 30% of score
- Length of credit history = 15% of score
- Credit mix currently in use = 10% of score
- New credit = 10% of score
Step 1: Get a Free Copy of Your Credit Report
The first step towards fixing bad credit is to know what is being reported about you. The easiest way to do this is to get a free copy of your credit report. U.S. federal law entitles every U.S. resident to a free copy of their credit report once every twelve months, available at annualcreditreport.com. You’ll need to pay extra or use a different service to get your actual credit score.
Step 2: Review Your Credit Report for Errors
One of the easiest ways to improve your credit score is to fix errors. But before you can fix them, you’ll need to review your report to locate the errors. A survey from the FTC found that 25% of consumers found errors on their credit reports that may have affected their scores, and that 20% of consumers had an error that was corrected by a credit reporting agency after it was disputed.
Here are some of the common errors to look for:
- Wrong street address
- Wrong name (look out for a similar name or suffix being reported on your report)
- Fraudulent accounts, otherwise known as accounts that you didn’t open – beware, as this could be identity theft
- Incorrect account information such as:
- Inaccurate credit limits
- The wrong origination date on a loan
- Accounts that are mistakenly shown as being open or closed – look to see if there’s a notation on the account saying if you or the creditor closed the account (and if that’s accurate)
- Wrong payment status information
Step 3: Dispute Errors on your Credit Report
Once you’ve reviewed your credit report for errors, next you’ll want to dispute those errors with the credit bureaus. You can do this using a letter (like this sample from the FTC), or you can dispute them online through each of the three credit bureaus. In both scenarios, you’ll want to point out the errors, and state why the information is inaccurate, then request that the items be fixed and/or removed.
It’s a good idea to send a copy of your credit report and, if you are disputing by mail, send it via certified mail. If you prefer to dispute your credit errors online, use the resources below for each of the three credit bureau’s pages with information on their process:
Step 4: Look at Outstanding Debt
Your debt-to-credit (CTC) ratio refers to percentage of your income that goes toward paying your debt each month. Keeping a lower debt-to-credit ratio can help improve your credit score. Lenders want to make sure that you’re living within your means before they allow you to take on more debt. Strategies for lowering your DTC is to pay down your current debt and get an increase on your credit limit, without utilizing it.
Step 5: Set up Automatic Payments
One of the most important factors in credit worthiness is your ability to pay your bills on time. Utilize Peapack-Gladstone Bank’s online or mobile banking to set up a recurring payment for the bills that are the same each month to make sure those are always paid on time.