Getting a car loan doesn't have to be a nightmare, even with bad credit.

How to Improve Credit Score When You Have Bad Credit

last updated June 20, 2018

If you need a brand new car but don’t have enough cash, then you’ll need to apply for an auto loan. To qualify, you need a source of income and a decent credit score. But, if you have an embarrassing credit rating, you’re probably thinking of how to improve credit score when you have bad credit.

There are two ways to help you redeem your bad credit. If you want to fast-track your improvement, you can hire a certified financial coach. On the other hand, you can learn how to fix bad credit ratings when you have bad credit by talking to people who faced a similar challenge.

The good news is that you can start your credit score improvement journey today. Here are some important facts below on how to rebuild your credit score in order to get best interest rates on car loans.

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You can improve your credit rating without spending a lot of money


1. How long does it take to improve credit score?

Long-term debts have a larger impact on your credit report than short-term unsecured debts. Mortgages, auto loans, and student loans are good examples of common long-term debts. Payday loans and credit card debts are short-term unsecured debts.

Let’s assume you had skipped a couple of credit card payments then cleared your outstanding balance recently. According to FICO, you should see a minor improvement in your credit score after 90 days. People who default on credit card payments need at least 18 months to see a significant improvement in their credit ratings.

When you skip a couple of mortgage payments consecutively, it will take you at least three years to improve your credit score from 720 to 780. Sometimes it may take seven years if you have a number of outstanding debts. Also, the higher your credit score, the longer it takes to restore it.

2. How fast can you raise your credit score?

The good news is that you can bring about minor improvements within a month. You also don’t need to spend a lot of money to improve your bad credit rating within 30 days. For instance, cross-checking your credit report with your current and former creditors. This helps in identifying any paid debts, which your creditor hasn’t yet reported to the credit reference bureaus.

Second, you can request a family member who has a credit score above 720 to add you as an authorized user in their credit card account. Doing this improves your credit score within 30 days because of associating yourself with a debtor who pays their debts on time. It’s advisable to sign up on a credit card that’s been active for at least 2-5 years. Why? Because your payment history accounts for 35 % of your credit score.

Finally, you can resort to debt settlement. If you currently have a large outstanding debt, you can save up 50-60 percent then approach your creditor. Take time to explain your financial situation and negotiate for partial payment. Your creditor may accept this and save your credit score by not reporting skipped payments.

3. Is there a secret to improve a bad credit score overnight?

Absolutely not.


Four proven tips on how to improve credit score when you have bad credit

1.  Ensure your debt to income ratio is within CFPB’s recommended range

The Consumer Financial Protection Board exists to protect credit consumers from abusive and unethical practices. Have you ever heard about the 43% rule? According to the CFPB, you should maintain a debt to income ratio of 43 %. Income here implies your gross pay.

At this level, you can comfortably meet your monthly debt obligations and still afford a decent life.

This formula seems pretty straightforward but very few borrowers actually sit down and calculate their debt to income ratio. Don’t wait until the bank’s credit officer informs you that your debt to income ratio is over 50 %. Pay off all your small debts to improve your ratio.

 2. Pay your debts on time

Your payment history accounts for 35 % of your credit history.

Paying your debts on time not only improves your credit score, but it actually gives you peaceful nights. You can put more focus into your daily activities when you’ve paid an auto loan or credit card installment on time. Plus, it’s easier to request for a higher credit limit because paying your debts on time establishes trust between you and your creditors.

3. Do not apply for several credit cards within a short time

One of the ways you can boost your dwindling credit score is by applying for a new credit card. When a creditor issues you with a new credit card, it increases your credit limit. According to FICO, a credit limit constitutes 10 percent of one’s credit score. So, it’s obvious that increasing your credit limit has a direct positive effect on your credit rating.

If applying for a new credit card increases one’s credit score, why then is it wrong to apply for several cards?

Whenever you apply for a new credit card, the creditor performs a hard inquiry. Each inquiry deducts five points from your credit score. Also, when a potential creditor notices that your credit report shows a lot of hard inquiries performed within a short period, he or she concludes that you’re bad for business.

4. Apply for a credit-building credit card

A credit-building credit card enables former defaulters to enjoy controlled credit spending while improving their credit scores simultaneously. They exist because of the difficulties former defaulters face whenever applying for normal credit cards.

When you apply for this card, you’ll start out with a low credit limit. If you pay your monthly obligations on time, the creditor increases your credit limit.

You can do it!

Now that you’ve learned how to raise your credit score without necessarily requiring a certified financial coach, go ahead and apply these tips today. Create a savings plan that will enable you to save up enough money to settle a long overdue debt. Reach out to your creditors when you still have time for negotiation. You can also download financial management apps to track your income and expenses daily.

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