5 Steps to Go From Bad Credit to Good Credit in 2023

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Make this the year that you fix your credit. 

Your credit score is an important number, and unfortunately, a low score can cost you a lot of money. Home buyers with bad or even average credit get APRs over 1.5% higher than those with excellent credit, according to MyFICO. That could end up costing you over $100,000 in interest on a $300,000 home. Your credit can also affect your car insurance costs in most states, and drivers with poor credit pay more than double in premiums.

Numbers like that provide plenty of motivation to improve your credit score, and this doesn’t need to be a process that takes years. With the right steps, you could potentially go from bad credit to good credit in 2023. Here’s how to do it.

1. Learn what’s good and bad for your credit

A good place to start is by learning exactly what factors impact your credit score. These are:

Payment history: On-time payments are good, and payments that are 30 or more days late are bad. If you make a late payment, but it’s less than 30 days after the due date, it doesn’t count as late on your credit report or affect your credit score.Amounts owed: This refers to how much debt you carry in total, but the key part is your credit utilization ratio — how much you owe on your credit cards compared to their credit limits.Length of credit history: This includes how long your accounts have been open, including your oldest account, newest account, and your average credit account age. A long credit history is better, but you can still have good credit without one.Credit mix: Your mix of credit cards, loans, and other financing plans. A more diverse mix is better, but it isn’t required for good credit.New credit: If you’ve opened too many new credit accounts recently, it can have a small impact on your credit score.

The two most important, by a wide margin, are payment history and amounts owed. If you do well in those areas, your credit score will be in good shape.

2. Pull your credit reports

Visit AnnualCreditReport.com to request your free credit report. This is the site authorized by the government to provide credit reports to consumers. Request your credit report from the three credit bureaus: Equifax, Experian, and TransUnion.

Consumers are entitled to one free credit report per year from each bureau. But through 2023, free weekly credit reports are available, so you should have no trouble getting your report free of charge as often as you want.

Once you have your credit reports, look for negative items affecting your credit score. That way, you’ll know exactly what to fix. Examples of what to look for include:

Late paymentsAccounts sent to collectionsHigh credit card balances

3. Dispute any mistakes you find

Credit reporting mistakes are more common than you might think, as 34% of Americans found them in 2021, according to a Consumer Reports investigation. It’s important to fix credit report errors, as they could have a big impact on your credit score.

To get an error removed, dispute it with the credit bureau that issued the credit report. Each credit bureau lets you do this online. Here are the links for each credit bureau’s dispute page:

Equifax disputesExperian disputesTransUnion disputes

4. Make every payment on time

Since your payment history is the most heavily weighted factor in your credit score, paying on time is extremely important. This is one area where there’s little room for error. Even a single late payment can cause your credit score to drop by over 100 points.

Fortunately, late payments don’t count against you until your account is 30 days past due. Before that, you have time to prevent any damage to your credit score. Keep in mind that if you have an account that’s officially late, it’s still helpful to get caught up. Accounts that are 60 days and 90 days past due hurt your credit more, so the sooner you make your payment, the better.

Consider setting up auto-pay on your credit cards and loans, or set payment reminders for yourself. Other types of bills, such as utilities, normally don’t count toward your credit score. The exception is if they go to collections. Of course, it’s still best to pay everything on time.

5. Pay down credit card debt

The other key factor in your credit score is your amounts owed, and more specifically your credit utilization ratio. An easy rule of thumb is to keep this below 30%. Let’s say you have one credit card with a $1,000 credit limit. It’s recommended that you keep the balance below $300.

The great thing about credit utilization is that only the current number matters. Your credit utilization from, say, three months ago doesn’t. That means if you have high utilization, and you pay down your balances, you can quickly improve your credit score. Come up with a plan to get out of credit card debt, and not only will you save money on interest, but your credit score will go up.

Going from bad credit to good credit isn’t a complicated process. All you really need to do is get rid of any errors on your credit report and follow a few good financial habits. Give the steps above a try, and you’ll have a much higher credit score by the end of the year.

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