So You Have Bad Credit…Now What?

Your credit is a key that can unlock numerous financial opportunities or, unfortunately, close many doors. Having good credit can help simplify many aspects of life, including renting or buying a home and purchasing a car. On the other hand, a poor credit score can limit these opportunities and result in higher costs.

The good news is that even if you find yourself with less than ideal credit, there's a path forward. It won’t be a quick journey, but with dedication and implementing the right strategies, you can improve your credit score and reclaim your financial freedom.

Your Credit Today

Before we can explore the steps for improvement, let's consider where you stand compared to other consumers. According to Experian, the average FICO Score in the U.S. reached an all-time high of 716, which is close to the maximum credit score of 800. This statistic may sound encouraging, but it doesn't tell the whole story.

Significant disparities persist across age groups and regions, with younger generations often facing more substantial credit challenges. Millennials, for instance, have an average credit score of 686, while Gen Z trails behind at 660. These disparities highlight the importance of proactive credit management, regardless of your current situation. So, if you’re one of the many Americans with a low credit score, here's what you need to know.

Getting Back on Track

The first step to improving credit is reviewing your credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. You can do this for free up to once a week at AnnualCreditReport.com. Take the time to review these reports carefully and look for any errors or discrepancies that might be dragging down your score.

Once you have a clear picture of your current situation, it's time to get to work. The foundation of good credit is making consistent, on-time payments. Explore automatic payment options or set reminders to ensure you never miss a due date. First Harvest offers automatic, recurring monthly loan payments through Online Banking, so you can avoid late fees and enjoy financial peace of mind.

A significant factor in your credit score is your credit utilization, which consists of how much of your available credit you’re using on average. It's recommended to keep your utilization below 30% on each credit line and across all credit accounts collectively. A lower utilization rate suggests to creditors that you're able to use credit responsibly and not overextending yourself financially. In this case, someone with a $1,000 credit limit should ideally keep their balance under $300. Reducing your credit utilization can be achieved by paying down existing balances and avoiding large, new purchases on credit.

As you work on paying down your debts and making timely payments, resist the temptation to close your old credit accounts. The length of your credit history also plays a role in your credit score, so those old accounts, even if rarely used, can be beneficial. Instead of closing these accounts, make small purchases occasionally to keep them active.

While rebuilding your credit, be cautious about applying for any new credit. Each application typically results in a hard inquiry on your credit report, which can temporarily lower your score. If you need new credit, research and apply for products you will likely qualify for.

Bad Credit or No Credit?

For those struggling to qualify for traditional loans or checking accounts, a secured credit card, credit builder loan, and second-chance checking accounts can be valuable tools to help you establish better credit history.

Secured credit cards, like First Harvest's Groundwork Secured Credit Card, require a cash deposit that typically becomes your credit limit. Use these responsibly by making small purchases and paying the balance in full each month to start establishing consistent and on-time payment history.

Another strategy to consider, especially for younger individuals, is becoming an authorized user of a family member's credit card. For example, a parent's positive payment history can help boost a young adult's credit score over time.

Second-chance checking accounts, like First Harvest's First Step Checking Account, offer a simple solution that help consumers build positive checking account history for a small service fee while providing many of the same benefits and features of a traditional checking account.

Another effective credit repair tool can be taking advantage of a credit builder loan program, such as First Harvest’s Credit Builder Loans. These types of loans can help document positive payment history, one of the most important factors in credit scoring. Rather than receiving the loan proceeds upfront, the funds are secured in a savings account while the borrower makes affordable monthly payments. As payments are made, the positive payment history is reported to credit bureaus, helping to strengthen the borrower’s credit profile. At the end of the loan term, the borrower gains access to the saved funds along with any dividends earned, providing the dual benefit of building credit and accumulating savings at the same time.

Communicating with Lenders

If you find that you're struggling to make loan payments, it's essential to maintain open communication with your financial lender. Reach out proactively to discuss your circumstances. Many lenders will work with you to create a manageable payment plan.

The Takeaway

When working to improve credit, remember that patience is key. Most negative items will stay on your credit report for up to seven years, so improving your credit score takes time. But don't let that discourage you. Every positive step you take today brings you one step closer to your overall goal of better credit.