Mistakes happen, but how do you recover from mistakes with your credit?

At some point in everyone’s life, credit is necessary. You may need credit to get a lease on a new apartment, buy a car, or get a new phone. But what happens when you have a negative mark or two in your credit history? How do you rebuild bad credit, and how long does it take?

This article will cover the five categories that affect your credit score and how long it will take to correct an issue within each category. By the end of this article, you will know how to turn poor or fair credit into good or excellent credit. 

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What Does My Credit Score Mean?

Your credit score is a three-digit number that lets interested parties know your creditworthiness. The higher your score, the more creditworthy you seem. A credit score ranges from 850 to 300. Your score will fall into one of the following categories:

  • 800-850: Excellent Credit
  • 740-799: Very Good Credit
  • 670-739: Good Credit
  • 580-699: Fair Credit
  • <580: Poor Credit

Your lender, credit card company, landlord, and even employer may request to see your credit score. While the system may not be perfect, it is the system predominantly used today. 

Uncover Your Credit History

If you’ve discovered that your credit score is not where you want it to be, you need to examine everything that’s on your credit report. Negative information in your credit report is what brings your score down. You can access a free credit report for free once per year at AnnualCreditReport.com. You can also get a less detailed overview by using the free services at Credit Karma. 

Once you have an overview, look for the problem areas. Issues with your credit history will fall into different categories. Each category has its own weight on the score overall. Some categories make up a large portion of your credit score, while others make up a small portion. Marks in the more heavily weighted categories typically affect your credit score longer than less heavily weighted categories. 

However, corrections in these categories can also increase your credit score more quickly. No matter what your credit score is now, remember that a good credit score is always in reach with time and dedication. 

Credit Issues By Category

Below are the categories that make up your credit scoring, along with the percentage of your credit score each category counts toward.

Payment History

Your payment history is your record of on-time payments. When you keep your accounts in good standing, you avoid negative reporting on your credit history. Problems in this category have to do with missed payments. Designations include:

  • Bills past due 30, 60, or 90 days
  • Bills sent to collections

Negative marks stay on your accounts for at least seven and a half years. After you make your accounts current, late payments weight your score less as you continue to make on-time monthly payments. Many lenders are more receptive to old errors than new ones. 

Payment history accounts for 35 percent of your credit score. Any negative remarks here can significantly lower your credit score

Fixing Payment History Issues

The best way to fix this payment history problem is to get your accounts current as soon as possible. If your debt is in collections, you should investigate if the bill is legitimate. If so, pay it right away. That collections debt can be sold over and over again, keeping its record alive on your credit report for years. Since collections agencies buy debt for pennies on the dollar, you may even be able to negotiate for a lower payout amount.

You can even request that the late payment be removed from your credit report. This is usually done in writing with a letter of goodwill. If your late payment was a one-time mistake or caused by factors out of your control, you’ll likely find some leniency. 

Preventing Payment History Issues

If paying on time is a problem, you’ve got to budget. Budgeting and tracking expenses keep your financial habits working for you—not a corporation making money off your late fees. Additionally, you can set up autopay from your bank account to cover your regular bills and never miss a payment. Autopay usually comes with a discount as well.

Amounts Owed

Your amounts owed accounts for 30 percent of your credit score, which makes it very influential on your credit score. This category refers to three factors:

  • The amount you owe on revolving credit compared to the credit line.
  • The amount you owe on an installment loan compared to the original borrowed amount.
  • The amount of debt you carry in total.

That first part is called your credit utilization ratio. You want your credit utilization to be as low as possible. Below 30 percent is a must, but we recommend you keep it even lower to 10 percent. That way you have a little room for accounting errors. 

When it comes to installment loans, the further along you are in paying it off the better. Financial institutions want to see that you know how to manage debt effectively. But they also want to know that you’re not carrying so much debt that it makes you a liability. 

The amount of debt you carry in total affects you in different ways depending on the debt. 

Fixing Amounts Owed Issues

Maxing out your credit card can drop your credit score by over 100 points. Luckily, paying off your credit card debt can raise your score by 100 points. How quickly your score is raised depends on how quickly you pay off your debt. You can also correct credit utilization problems by asking for a credit limit increase. Just be very careful! You don’t want to raise your limits (a good thing) only to raise your balances (less than ideal).

If you find you carry too much debt or you’re far from paying off installment loans, paying down your balances is your only bet. The faster you pay it down, the quicker your score will go up. As an added bonus, you’ll pay less in interest. 

This is one of the more forgiving parts of your credit score. As it is weighted heavily, fixing issues here pays off quickly. And unlike payment history, carrying a balance on your credit card doesn’t haunt you for years. 

Preventing Amounts Owed Issues

Keeping an eye on your credit utilization is a major key to keeping your amounts owed category healthy. As we said before, aim to always keep your balances below ten percent of your credit limit

When it comes to other lending, moderation is your best friend. A huge mortgage, luxury car, and speedboat may seem like the keys to happiness, but they aren’t. If you feel pressured to live beyond your means, take some time for self-reflection. 

Investing in your home, transportation, and recreation should bring your prosperity. Not weigh you down with debt. 

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Length of Credit History

The length of your credit history accounts for 15 percent of your credit score. It is determined by a number of factors. These include:

  • The age of your credit lines
  • The age of your oldest credit line
  • The age of your youngest credit line
  • The average age of your credit lines
  • The last time your credit lines were used

Problems occur when you have no credit accounts, open new accounts, or close old revolving credit accounts. Paying off an installment loan, however, usually has a positive effect on your score. 

Fixing Length of Credit History Issues

Unfortunately, if you’re new to credit reporting, there isn’t much you can do to influence your credit history. One tactic is to find someone who is willing to add you as an authorized user to their credit account. Being added as an authorized user can boost your credit score by:

  • Giving you access to a credit line
  • Showing a positive payment history
  • Giving you the lending history of the credit line

This move is not foolproof. Your credit score is calculated differently with each credit bureau. The way the credit card company reports authorized users and the way that bureau records that information affects your FICO scoring. 

Preventing Length of Credit History Issues

Once you begin to open credit accounts, be cautious. The average age of your credit account makes a difference. If you have two credit cards that are six years old, your average credit history is six years. However, if you were to open a new credit card, your average credit history would be four years. 

Similarly, if you close an older credit card, your average age can be affected. If you have credit cards that are three, six, and nine years old, your average credit history is six years. But if you close your oldest credit card, your average credit age drops to four and a half years.

Credit Mix

Credit mix refers to the balance you have between revolving credit and installment credit. With revolving credit, you obtain a credit line. You can charge expenses to your credit line up to the limit. Revolving credit includes credit cards and home equity lines of credit (HELOC).

With installment credit, you receive a lump sum to make a large purchase. Then you pay that loan back in installments, usually over several years. Examples of installment credit include mortgages and car loans

Financial institutions want to see that you can manage both types of credit effectively. The more even your mix of credit, the better off you will be. 

Fixing Credit Mix Issues

Sometimes people with student loans don’t get credit for using an installment loan. Frustrating as it is, this happens all the time. If you’re stuck with this issue, but don’t want a new large or expensive loan, consider a credit builder loan

These loans help you show that you can handle installment credit. Plus, these loans are typically inexpensive and sometimes come with a partial refund of any interest paid. If you need a loan right away, you can also look into credible financial institutions that lend to people with bad credit

If your issue is with revolving credit, look into getting an appropriate credit card. If that’s not an option, you can look into a secured credit card or be added as an authorized user on a family member’s account. Just be sure any account you’re added to is in good standing. 

Preventing Credit Mix Issues

Building your credit history thoughtfully helps you avoid problems with your credit mix. Knowing how credit mix affects your credit score is key to building thoughtfully. Always be wary of loans that come with high-interest rates or advertise “all credit scores accepted.” 

While it may be easier to get approved for these loans, the high-interest rates can hinder your financial success greatly. 

New Credit

New credit accounts for ten percent of your credit score. This category is affected by new lines of credit. This could be a credit card, mortgage, car loan, or other credit product. Unfortunately, when you apply for new credit a hard inquiry notice is added to your credit history. This inquiry usually lowers your credit score temporarily even if you’re approved.

Fixing New Credit Issues

When you open new credit, be expected to wait out a recovery time. Eventually, proper use of the credit line and on-time payments will turn your new card into an asset. You can expect to wait anywhere from three months to a year and a half.

Preventing New Credit Issues

If you’re planning to buy a house or make another major financial move, wait before opening a new account if at all possible. The higher your score, the lower your interest rate. Even half a percent in interest can save you thousands of dollars over the life of your loan. 

Additionally, don’t apply for multiple lines of credit in rapid succession. Two lines of credit are plenty at once. Be sure to give your score time to recover with proper credit line use. 

Other Factors Influence Changes in Your Score

The length of your credit history influences how new information affects your credit score. For example, if you have years and years of credit history, opening a new credit card will have less of an adverse effect than it would with a short credit history

Another factor is the extent of change made to your credit history. For example, a late payment of 30 days versus a bill that’s gone to collections. The collections mark will likely hurt your score more than the late payment

The same logic applies to changes that make your score go up. Eliminating your credit card balances altogether will raise your credit score much higher than reducing your balance by a few hundred dollars. Regardless of the extent, changes that make you look more creditworthy are important and worth it. 

Your credit score will fluctuate seemingly faster or slower depending on the reporting date of your credit accounts. For example, most credit card companies report your balances shortly after the statement end date. That means that, if your creditor reports balances, the balance you have before your pay your bill can be reported. 

Keep in mind, you are allowed to ask questions both before and after you open credit accounts. And you absolutely should. Your knowledge of how your accounts work protects you from small errors that can cause big issues. Don’t be afraid to read over your documentation or ask a financial representative to explain any confusing language in detail. Upon request, translation services should also be provided by financial institutions for speakers of other languages. 

Frequently Asked Questions About Rebuilding Credit

What should I do if I’ve been denied credit?

If you’ve been denied access to credit of any kind, you have rights. You have the right to a copy of your credit report from the agency the financial institution uses to determine approval. The agency will be either Transunion, Equifax, or Experian. Examine the information on your report. If any information is an error, address it. Otherwise, deal with any issue as outlined above.

Conclusion: Repair Takes Time, But It’s Worth Every Second

Repairing credit seems like a slow process at the beginning. However, once you correct issues and continue to show good financial habits, you’ll see growth month after month. It’s not always fun or easy to “play the game” when it comes to financial planning. But, in the immortal words of Beyoncé: “Always stay gracious; best revenge is your paper.”

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Updated June 19, 2020

J.J. Starr is a financial copywriter and enjoys helping readers find the information they need. In addition to her background in banking and financial advising, she is also a poet with an MFA from New York University. She lives in Amherst, Massachusetts. You can learn more at jjstarrwrites.com.