By: Taylor Covington
Taylor is a writer for The Zebra, the nation’s leading insurance comparison site. An “everyday expert”, she covers the finer points of insurance, insurtech, and personal finance. In her hometown city of Austin, Texas, she can be found reading at Half Priced Books or eating at Via 313, the world’s greatest pizza.
How to Conquer a Bad Credit Score
The time has come for a new step in life. Maybe you just got a new job in a new city and you need a car for the first time. Maybe you’re looking to purchase your first home or build upon your wealth with a new rental property.
You go to get a loan and — yikes, the financial manager takes one look at your credit score and immediately turns you away.
To banks, lenders, and even car insurance companies, your credit score is an indicator of your overall financial health. It impacts the interest rate of any loans you apply for and may even be the reason you’re approved or denied for one.
A high credit score shows lenders that you’re likely to pay your debts and present a low risk of defaulting on your loan.
If your credit score is low, it’s due to a mixture of high credit card utilization (how close your balance is to the limits of your cards), late payments, fraud, loan defaults, too many hard credit checks (an indicator that you’re frequently applying for loans or lines of credit), too few accounts on file, and too short a credit history.
Finding out you have a low credit score can come as a big shock and that negative score will affect every major financial decision you make. However, rest assured knowing that a bad score can be temporary and with a strict strategy in place, a financial setback doesn’t have to ruin your plans for the future.
4 Ways to Restore Your Credit Score After a Disaster
Much like building your credit from zero, you can rebuild your credit, even if you must be patient while doing so.
The following are 4 ways to help restore your credit score:
Tip #1: Save everything you can.
While it’s a simple piece of advice, it's still a very important one. Savings are ideal for building an emergency fund to help tide you over when your income dries up (from a health issue or job loss, for instance) and also negates the need for loans and lines of credit.
For example, if you had focused more on saving before buying your first car, there wouldn’t have been much of a need for a loan. Additionally, even if you didn’t have quite enough to buy the car with cash, a hefty down-payment would have demonstrated to the lender that you were capable of saving – and would reduce how much total interest you'd pay over the term of the loan.
Tip #2: Create a budget . . . and stick to it!
Budgets aren’t fun. They prevent you from making impulse purchases that aren’t always the smartest decisions to make. But that’s the entire purpose of a budget.
A budget ensures your expenses never exceed your income – or if they do, your income is used in the most efficient manner possible. You can still go to dinner or get a few drinks with your friends, as long as you don’t go over whatever amount you’ve allocated for such activities.
A zero-based budget will serve you well in giving every dollar you earn a purpose. This method will prevent you from “bending the rules", unbalancing your budget, and help you stay on track as you pay down your debts and slowly rebuild your credit.
Tip #3: Cut expenses.
When life throws you a curveball, sometimes there are sacrifices to be made and this can mean canceling subscriptions like Spotify Premium or Netflix. Using the snowball method, you can take all the money saved from lowered monthly bills to pay off the balance of your credit card, and the next one, and so on.
It’s tough to cut expenses and sacrifice your favorite pastimes, hobbies, and subscriptions, but it’s only a temporary measure until you find more stable financial footing.
Tip #4: Pay attention to your credit utilization.
Credit cards aren’t bad if used properly, but you have to pay attention to the balance you carry month-to-month. Your credit utilization rate, your balance vs. the total limits of your credit card, affects up to 30 percent of your credit score, making it one of the most important factors to manage.
Once you’ve got some funds in your savings, a budget to stick with, and have cut as many expenses as possible, work next on lowering your credit utilization. Tempting as it may be to use your cards, you’ll have a much better credit score the less you use them.
A Low Credit Score Isn’t the End of the World
It may feel impossible to overcome a low credit score and develop a healthy financial situation, but time and effort will inevitably pay off. Growing your credit score is a process, whether you’re starting from zero or rebounding from financial disaster.
Approach the process with a strategy and the understanding that you’ll eventually be in a much stronger financial position. After a while, you’ll start to see your credit score ticking upwards at the same time your debt trending downwards. Plus, you’ll have developed some great and long-lasting financial habits.