In 2020, US consumers had an average of $5,315 in credit card debt and were using 25% of their available credit. Though last year’s figures were lower overall than they were in 2019 -- likely due to disruptions from the COVID-19 pandemic and lockdowns across the country -- individuals with very poor credit were found to have the highest credit utilization rate. (Your credit utilization rate is how much you currently owe divided by your credit limit.)
Translation: Those with low credit scores are carrying the bulk of credit card debt in the US.
A low credit score can keep you from getting the best rates on loans and credit cards, leading you to pay higher interest rates or be ineligible for credit offers. You could also have a hard time getting approved to rent an apartment or get utilities. In some instances, a below-average credit score can also affect your job prospects. But if your credit score is lower than you’d like, it is possible to rebuild your credit and improve your score. We’ll explain how.
How your credit score is calculated
Before you can repair your credit, it’s important to understand how your credit score is calculated. Data from your credit report, which contains information on any credit accounts such as credit cards, car loans, student loans and more, is used to calculate your credit score. This data is reported to the three major consumer credit bureaus: Equifax, Experian and TransUnion. (You might have three different credit scores with each, because not all lenders and creditors report to all bureaus, and they don’t always report at the same time each month. The scores will usually be similar, though.)
For the purpose of this article, we’ll be referring to your FICO score -- one of the most popular credit scores -- which is divided into five categories:
- 35% payment history: Your past pattern of payments (on-time or late) and amount paid (minimum due, full balance or another amount) can raise or lower your credit score.
- 30% amount owed: The balance you carry on all accounts compared to the amount of credit available to you makes up your credit utilization rate. Your credit score will improve as this rate decreases.
- 15% length of credit history: The longer you’ve owned a credit account, the more your credit score will increase.
- 10% new credit: When you apply for new credit, the card provider will likely pull your credit (also known as a hard inquiry), which can cause your score to temporarily drop by a few points. However, if you’re approved for a new card, your score is likely to go up, offsetting this temporary dip.
- 10% credit mix: This is the variety of credit you hold (student loans, credit cards, student loans, etc). When you apply for a new type of credit account, it could boost your score.
Your credit score is continuously updated as your credit profile changes. FICO scores are between 300 and 850. Credit scores between 300 and 499 are considered “very poor” and those between 500 and 600 are considered “poor.”
8 steps for fixing your credit score
1. Check your credit report and score
If you want to increase a low credit score, the first step is to look at your credit report and review it for accuracy. Throughout the pandemic, you can access free weekly online credit reports from the three bureaus by going to AnnualCreditReport.com. You can also get up to six free credit reports through 2026 from Equifax.
It’s important to get your credit report from all three credit reporting agencies. Checking your own credit score is a soft hit on your credit and will not impact your score.
2. Dispute any errors
If you find an error on any of your credit reports, dispute the error right away. You may need to provide documentation indicating what information is incorrect (such as confirmation that you paid your bills on time if they were reported as late).
The credit bureau has 30 days to complete its investigation. If the reporting agency asks for more information within that window, it is allowed an additional 15 days for a resolution as defined by the Fair Credit Reporting Act.
Depending on the error, a resolution could improve your credit score quickly. However, there is still more work to do to boost your score.
3. Get bill payments under control
The biggest impact on your credit score is your payment history, which accounts for 35% of your score. If you want to improve your credit score, paying your bills on time will help. One way to stay on top of your payment due dates is to set up automatic payments for your existing accounts. This way, you don’t have to remember to make a payment every month, and it will always be on time.
While we always recommend paying off your full balance, if you can’t afford it, paying the minimum amount due can help you avoid late fees and even higher interest fees. Paying the minimum will slowly chip away at your balance, which will improve your score over time.
4. Set a goal for less than a 30% credit utilization ratio
Your credit utilization ratio is calculated by dividing your total debt owed by your total available credit. So, if you have $3,000 in total credit and have a combined credit card and loan balance of $800, your credit utilization rate would be 26.67% ($800 divided by $3,000). In general, the higher your utilization ratio, the lower your credit score. While your payment history is the most important factor in calculating your FICO credit score, your credit utilization ratio is the second most important.
If your credit utilization ratio is 30% or higher, set a goal to get it lower than 30%, with 10% or less being the ultimate goal. Paying your outstanding balances off quickly and avoiding taking on more credit card debt can help you reach your goal faster. You can also ask to raise your credit limit, though this tactic may not work if you’re still using your credit card for purchases.
If you have a significant amount of outstanding credit card debt, you may be able to consolidate the debt to make payments more manageable and pay it off faster. A debt consolidation loan or credit counseling program could help you reach your credit utilization ratio goal.
5. Limit new credit inquiries
Anytime you apply for credit or ask for a credit limit increase, an inquiry is made on your credit. There are two types of inquiries -- a soft inquiry and a hard inquiry.
A soft inquiry does not affect your credit score and occurs when:
- You check your own credit
- You give permission to an employer to check your credit
- Credit card companies check to see if you’re preapproved for offers
- Financial institutions you do business with check your credit
A hard inquiry happens when you apply for new credit, and it can hurt your credit score. While one hard inquiry may only have a temporary effect, multiple inquiries in a short time frame can damage your credit score and make lenders hesitant to work with you.
6. Avoid closing old credit cards
If you’ve paid off a credit card and don’t plan to use it, you may think that closing the account is the right move. Actually, closing old credit cards can lower your credit score even more. Credit history length accounts for 15% of your credit score, and the longer your credit history, the better.
Instead, cut up the old cards so you aren’t tempted to use them again. You can’t control if a card issuer closes the card, and after a certain inactive period, the issuer may close the account. If your credit card has an annual fee, it may be a good idea to close the account if you don’t plan to use it again.
7. Consider a balance transfer card
If you’re swimming in credit card interest, one possible solution is moving your balances to a low- or no-interest balance transfer credit card. Balance transfer credit cards typically offer 0% introductory APRs for 12 to 24 months. This lets you consolidate high-interest credit card debt onto one card, combining your payments and saving you in interest. Before applying for a balance transfer card, make sure you can afford to repay your debt within the introductory period -- otherwise you may find yourself right back where you started.
8. Apply for a secured credit card
Rebuilding your credit can take time, but you can improve a bad credit score with a secured credit card. A secured credit card works just like a regular credit card, but your credit limit is based on either a security deposit you pay or how much you put into an attached account, like a savings account. For instance, if you put down a $500 security deposit, your secured credit card limit will likely be $500.
With good payment history and credit usage, your credit limit may increase and you can get your deposit back. You may even have the opportunity to upgrade your card to a traditional credit card.
This depends on how your credit was affected and the seriousness of your credit issues. While some can fix their credit in a few months, others may find it takes a year or more to see serious improvements.
There are some legitimate credit repair companies that can help you dispute errors on your credit report. However, there’s nothing these companies can do that you can’t handle on your own through the credit bureau dispute process. If you do choose to use a credit repair service, be cautious of any company that doesn’t explain your rights as a consumer. Also, if a company asks you to pay upfront or promises to remove negative marks on your credit report that are accurate, it may be a credit repair scam.
Closing a credit card with poor payment history will not increase your score, and it could actually lower your score temporarily. When you close a credit card, it lowers your available credit and increases your credit utilization ratio. If it was one of your first cards, it could also lower your average credit history. All of these factors could damage your credit score.