You checked your credit score and it’s much lower than you’d hoped. What now? Instead of wallowing in self-pity and Häagen-Dazs, it’s time to take control of your finances and forge a new path to monetary success. While you won’t be able to change your credit score overnight, you should see it improve if you’re consistent with the following steps.
How to cope with bad credit
Here are six steps you can take to cope with bad credit and put yourself on track for increased financial wellness:
1. Correct credit report errors
The first step you should take is to have a close look at your credit reports with Experian, Equifax, and TransUnion. If you find any mistakes, send a written dispute to the credit reporting agency. They’re required by law to look into the reported errors and amend any inaccuracies.
2. Get your spending in check
It’s time to put yourself on a budget and improve the spending habits that may have caused your bad credit in the first place. Take a look at your monthly spending and see where you can cut back. Do you really need to buy that large macchiato with extra foam each morning?
3. Improve payment history
Your payment history makes up 35% of your credit score, so make sure you’re paying your bills on time and in full when you can. If you’re worried about forgetting to pay on the due date, consider enrolling into automatic payments.
4. Eliminate balances
If you have any existing balances, focus on paying off your debt. You could try using the debt avalanche method, where you first pay off the debt with the highest interest rate, or the debt snowball method, where you first pay off the debt with the smallest balance. Pick the method you think you’ll be most likely to stick with.
Note: Once you pay an account’s balance in full, you may want to keep it open. Closing accounts can lower the length of your credit history, which makes up 15% of your total score, and raise your credit utilization ratio.
5. Look into your credit utilization ratio
Check your credit utilization ratio, which is the amount of revolving credit you’re using divided by the amount of revolving credit available. If you’re using too much of your credit limit, your score could get dinged. A good ratio is 30% or less—the lower, the better.
6. Consolidate debt
Consolidating debt is when you combine several debts, such as credit card bills, into a single monthly payment with a lower interest rate. It can both save you money and simplify paying your balance each month. If you want to learn how to consolidate debt with bad credit, a debt management plan might be your best bet.