5 Tips on How to Improve Bad Credit

Building credit is very much like losing weight - getting there takes a lot of time and work. Quick solutions may lead you into a trap and leave you worse off than you were before. But if you are worried about your credit situation, that's a start - a lot of Americans aren't even aware that they are in trouble until they have to apply for a mortgage or get a car loan. But if you are determined to make things right, you'll eventually succeed, and the process is not that complicated. If you follow these 5 simple tips, you may get from bad credit to excellent credit in due time.

1. Check Your Credit Report

First things first - you need to know where you are now in terms of your credit score. Start by checking your credit reports and credit scores with the three major credit reporting agencies - TransUnion, Equifax, and Experian. You are entitled to one free credit report from each of these three credit bureaus every year.

When you receive the copies of your credit reports, take note of the things that hurt your credit score such as late payments, delinquencies, debts in collection, accounts you do not recognize and other suspicious records. Be attentive - a credit report is not flawless, it just contains data used to calculate your credit score and it may contain errors. There even may be errors in your personal information. If you see an error, dispute it with credit bureaus and/or your issuing bank.

Analyze all negatives that hurt your credit score. Bear in mind that your credit score consists of several things that affect it to a different degree. Some things have more weight than the others. In this pie chart, you can see which things have the most impact.

2. Get Rid of Your Debt

If you've studied the chart thoroughly, you've probably noticed that credit utilization makes up a large portion of your credit score - specifically, 30%. It's almost a third of the whole thing! Credit utilization ratio is the amount of your balance divided by your credit limit. In other words, it's how much you owe. The more debt you have, the less likely you have a good credit score. The perfect utilization ratio should not be over 30%. So, how do you remove debt?

Pay more than the minimum payment. Paying the bare minimum each month lets you shake off the thought of your debt for another month without consuming a lot of resources, so in the short run it may seem like a good way. However, as the APR takes effect, the interest is added to your balance, enlarging it drastically. As a result, your balance grows like a snowball each month, and one day the interest may exceed your initial balance. However, you may easily prevent this if you pay more than the minimum each month and don't let the interest grow.

Pay off your worst credit card first.As we already established, your credit utilization is a proportion. So if you take out the most affecting part of this proportion, it'll change for the better. Try get the credit card with the most debt out of the way first, and your overall debt-to-credit ratio will lower. Besides, a large debt is likely to collect more interest.

3. Get a Secured Credit Card

With a bad credit score, you're likely to face a dilemma: you need a credit card to build credit, but banks won't approve you for a regular credit card with a bad credit score. But there's a way around that. Secured credit cards are meant for building credit and are very easy to use. For a secured card you'll need to pay a security deposit that is usually equal to your line of credit. That is, if you need to pay upfront $200, you'll have a credit limit of $200, but once you close the card, you may get your deposit back. Some secured credit cards can even be upgraded to an unsecured account. Not very attractive? Consider this not a real credit card, but a tool to improve your credit. Below you can see and compare a range of secured credit cards and choose the one for you.