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At one point in the past year, I had a credit score in the 300 range. That’s beyond horrible. That’s a score you’d expect if you’d just filed bankruptcy. I’m not afraid to admit it, because in about six months I had boosted that score to almost 700.

Improving your credit score How to Improve and Monitor Your Credit Score by Using Technology How to Improve and Monitor Your Credit Score by Using Technology Your credit score can have a huge influence on your financial life. We explain how it's calculated and and how you can improve it. Read More doesn’t have to be a complicated, convoluted process. With just a few simple behaviors and actions, you can quickly boost your credit score in just a few short months. I did it with these six steps, and so can you.

This guide contains information from credit bureaus and respected credit institutions, so it’s more reliable than anything you’ll find on any forum or small blog online. In addition to learning how to improve your score, you’ll find lots of resources that can help. So let’s get started boosting that credit score!

1. Understand Your Credit Utilization

The single most important factor in your credit score is something called credit utilization.

Calculator and Bills and Budget
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Sounds complicated, but it’s not.


Credit utilization is the ratio between your available credit (all of your credit limits) and your total used credit (all of your credit balances). When you divide your balances by your credit limits and multiply by 100%, you should end up with a number under 30%. This represents a “healthy” credit utilization. It also leads to a very high credit score.

One of the largest credit reporting agencies, Experian, explains this as follows:

…one of the most important factors in credit scores is how close your balances are to your credit limits. Credit scores add up the limits and the balances on your revolving accounts in order to calculate your overall balance-to-limit ratio, or utilization rate. The higher your utilization rate, the greater the negative impact on your scores.

You’re probably thinking that a fast way to boost your score instantly is to just pay off every single credit card and never use them, right? That’s actually wrong. Believe it or not, a 0% utilization is actually a bad thing.

In 2016, Credit Karma Instantly Find Out Your Credit Score Free of Charge With Credit Karma Instantly Find Out Your Credit Score Free of Charge With Credit Karma Read More reviewed credit scores versus utilization ratios of its 15 million members and discovered a very interesting pattern.

Credit Card Utilization Graph
Image Credit: Credit Karma

People with 0% credit utilization actually had a worse credit score than those with 1–20% utilization.

What does this mean? It means that to build a credit score you should have plenty of available credit that you aren’t using, but you should try to use 1% to 20% of that total limit.

The rest of the actions in this article need to be tailored to your situation and your current utilization ratio. No one is starting from the same situation. For example:

  • If you’ve maxed out five credit cards with a $4,000 limit each, you’re at 100% utilization.
  • Maybe you have a single credit card with a $500 limit, and you’re using it to buy $300 worth of groceries every month. Even if you pay it in full, your utilization can fluctuate between 0% to 60%, depending when the credit bureau pulls its data.
  • Maybe you only use 20% of your available credit, but you occasionally miss student loan or mortgage payments Best Online Mortgage Calculators & How to Use Them Best Online Mortgage Calculators & How to Use Them Figuring out how much a mortgage will cost you in the long run can be hard, but these calculators make it easy, no matter how much information you have. Read More . Your situation requires a whole different set of actions.

The best way to start this process, before you continue with this article, is to determine your credit utilization. You can add up all of your credit card and loan balances, divide them by the maximum limits balances on those accounts, and multiply by 100%. Or you can use one of the tools below.

Credit Utilization Help

Don’t worry about trying to figure out your credit utilization on your own. There are lots of resources available to help you calculate it.

Balance-to-Limit Ratio Calculator

  • Credit Karma is a favorite when it comes to monitoring your credit situation. Not only does the site show you your overall credit score, but it also gives you your overall credit utilization pulled directly out of your credit report. No manual calculation required!

Credit Karma Score Overview

Of course, credit utilization is simple enough to do yourself with a simple spreadsheet 10 Helpful Spreadsheet Templates To Help Manage Your Finances 10 Helpful Spreadsheet Templates To Help Manage Your Finances Wouldn't it be great if you knew where your money was, at all times? Read More and a little bit of time. Taking the time to figure out where you stand with your credit is a critical first step toward getting it in order.

2. Settle With Your Debtors

Letting my credit score drop down into the 300s may have seemed like a terrible idea, but I had a plan. The issue was that I needed to let my score tank so that I could start working on improving it. Let me explain my situation, and it may help you to better understand your own.

Too Much Debt on Check
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Through a combination of overspending on several credit cards Find the Best Credit Card Deals Online With These 10 Awesome Sites Find the Best Credit Card Deals Online With These 10 Awesome Sites Whether you're looking for signup bonuses, cash back, rewards programs, or loyalty discounts, we've got your covered. Here are 10 sites that will help you find the best credit cards deals. Read More while in college and our family getting hit with a major medical crisis about ten years after graduation, we were faced with the following situation:

  • $100,000 in available credit and $30,000 in rotating balances, a utilization of 30%;
  • Mounting medical payments for ongoing treatments approaching $1,200 every month;
  • Back surgery that added to the already existing medical financial burden;
  • No way to pay for it all.

Since I’m the kind of person who will work three jobs rather than file bankruptcy, I was paying the minimum balance on all of our credit cards and paying all regular household bills on time, but not paying the hospital. There just wasn’t enough money left over.

Such a scenario only works for so long, and at some point you’re going to hit the point of no return, and we did. Figure something out, or file bankruptcy. In either case, my premium credit score of nearly 800 was in jeopardy.

After doing some research, here’s what I discovered. If you have a valid reason, like medical expenses, you can negotiate a settlement with creditors. So I started calling.

Businessman Working Hard at Computer
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Other reasons will justify a settlement as well, such as job loss, a death in the family, or any other reason for suffering a tremendous drop in your income.

You will also need a big lump sum of cash. Borrowing from your 401(k) retirement plan is an option if you have no alternatives. It isn’t considered an actual loan, so it doesn’t show up on your credit report. You can borrow up to 50% of your plan balance without penalty. However, before taking that route, see if a wealthy family member may consider giving you a loan instead, as dipping into your retirement savings can be disastrous in the long run.

How much will you need? Depending on your negotiating skills, you will be able to settle for somewhere between 40% to 60% of the credit card balance.

Here’s how to go through the negotiation process:

  1. Calculate what percentage of your debt you owe to each creditor. Divide your lump sum up among the creditors using those percentages. You can’t offer more than that amount for each creditor while negotiating.
  2. Stop paying your credit cards for over six months. Pay all other bills on time. Your credit score will plummet. It’s okay.
  3. After six months, call the creditors and explain you have a lump sum of money to distribute to your creditors, and offer to them 30% of the balance. They’ll scoff and say no. Thank them and hang up. Wait a month and call again.
  4. They will offer you lower payment plans. They will threaten to sue you. Simply say you have no money, only a lump sum to distribute to all creditors, take it or leave it. If they say no to 40%, hang up and call again in a month. Their tune will change in time.
  5. Eventually, either they or you will offer something in the range of 40% to 60% of the balance. Don’t get greedy. Ask how little you can pay up front to get the settlement agreement sent in writing. Once you get it, pay the rest.
  6. Keep in mind that you will need to pay income taxes on the portion of the settlement you got written off.

Why Must You Settle?

Because if you already owe nearly the maximum on all of your credit cards, none of the tips below will work. Your utilization is through the roof, and you’re basically debt-poor How to Get Rich: The Fastest Way to Get Out of Debt How to Get Rich: The Fastest Way to Get Out of Debt Imagine being debt free. No overdrawn balances or unpaid bills. There is a foolproof way of getting yourself out of debt. It starts with a plan and some discipline. Let's visit the other ingredients. Read More .

You have to reduce your balances by any means necessary. If you don’t have a medical or job-related reason to settle, then you need to reallocate your monthly budget The Best Free eBooks to Teach Yourself About Personal Finance The Best Free eBooks to Teach Yourself About Personal Finance If you want to get ahead in life, personal finance is a necessary skill. Make sure you up to speed with these awesome free eBooks. Read More and apply as much of your income as possible to paying off those balances as fast as possible. Once you get to that point, you’re ready to move on.

Resources for Debt Settlement

In my article on using Excel to manage your life How To Use Microsoft Excel To Manage Your Life How To Use Microsoft Excel To Manage Your Life It's no secret that I'm a total Excel fanboy. Much of that comes from the fact that I enjoy writing VBA code, and Excel combined with VBA scripts open up a whole world of possibilities.... Read More , I included a section on managing debt which shows you how to use Excel to pay down your debt using a snowball approach.

Debt Repayment Automation With Microsoft Excel

If you are only struggling with overspending, but actually do have enough money to pay your debts, then the above Excel-based approach is best. It can help you figure out how much of your budget you need to allocate to your debt payments every month, and it’ll help you make sure that you’re staying on track.

If you don’t have enough money to make payments, then you’re going to have to consider somehow settling those debts 3 Tips to Beat the Debt Collectors When Facing Bankruptcy (Or Late With Bills) 3 Tips to Beat the Debt Collectors When Facing Bankruptcy (Or Late With Bills) Serious financial problems are among the most stressful situations a person can encounter. Follow these tips to let technology take away some of the burden. Read More , either through a consolidation loan or some form of bankruptcy. Credit counseling services are an option if you want to settle debts but don’t feel comfortable negotiating them on your own.

  • Freedom Debt Relief is accredited by Consumer Affairs. It is a service that handles the negotiation of settlements with debtors for you, and arranges a payment plan that works with your budget. Just keep in mind that you pay a fee to Freedom, so you won’t save as much money as you would if you negotiated settlements on your own as described above.
  • Countrywide Debt is also accredited, and will help you work through your debts whether they’re secured, unsecured, business, or otherwise.
  • The National Foundation for Credit Counseling is a non-profit organization that will help you do an overview of your debt situation. It’ll help not just with credit card debt but also student loans, mortgage, bankruptcy counseling, and more.

Whichever option you go with, make sure to choose the right one for your situation.

3. Consolidate to a Single Debt

Maybe your issue isn’t an overload of huge balances, but an overload of small ones. Maybe you’re paying a minimum payment of $100 on five credit cards each carrying a balance of about $1,000. The credit reporting companies consider this as a hit against you.

John Ulzheimer, a credit expert who used to work for FICO and Equifax, explained to Bankrate that these are considered “nuisance balances,” and if you can consolidate them, you can boost your credit score.

Stack of Credit Cards
Image Credit: luchunyu via Shutterstock

There are two ways to accomplish this. If you already have very bad credit, then you should transfer the balances on the lower-limit cards to fewer higher-limit cards.

The second, and better, way would be to apply at your bank for a lower-interest personal loan, and transfer all of your low-balance, high-interest credit card debt to the loan. This is only possible if your credit score is good enough to get you a lower interest rate at your bank.

Resources for Debt Consolidation

Borrowing from your 401(k) may be the best option for you, since it won’t count as new debt and you pay yourself back interest rather than paying it to a bank. However, if a 401(k) loan isn’t an option, then you’ll need to select a debt consolidation loan. When it comes to debt consolidation, there are lots of scams out there. Review the following options to make sure you’re making the right choice.

  • Discover does not just offer credit cards, they also offer personal loans. If your credit is good enough, a personal loan from Discover will provide you with a reasonable fixed interest rate and flexible payment terms.
  • LightStream is a division of SunTrust Bank. Depending on your credit, you could get a loan with an interest rate as low as 1.99%. Consolidating your high-rate credit cards to such a low-rate personal loan will not only significantly boost your credit, but it’ll also save you a lot of money in interest. Check out the website and apply.
  • SoFi is a remarkable new consolidation loan opportunity. Not only are interest rates reasonable, but it also includes unemployment protection. If you lose your job, this program will suspend your loan payments without negative penalties for three months to a whole year over the life of the loan.
  • FreedomPlus lets you apply for a personal loan online, and within 48 hours you can have the funds you need to settle your debts with credit card companies and consolidate them all to a low-rate personal loan.

4. Don’t Close Accounts!

The next credit score “hack” is to increase the age of your credit accounts. If you’re working on shifting around your balances to fewer cards, leave the empty credit card accounts active. Why? Because of that utilization ratio factor that I mentioned earlier.

  • Owing $500 on five credit cards with a limit of $5,000 each is a 10% utilization ratio. That’s excellent!
  • Owing a consolidated $2500 on one credit card with a limit of $5,000 is a 50% utilization ratio. That’s bad!

Yes, consolidate your debt to a single card for ease of payment and simplifying balances, but leave those other accounts open so your overall available credit doesn’t change!

What if you’ve had to settle balances and your accounts get closed automatically?

If you’ve settled your accounts because of an illness or job loss, they will likely get closed and your score will drop precipitously low. This is only temporary. Your next job will be to continue paying all of your bills on time and paying all other loans you have (like your auto or mortgage loans). Your credit score will rise again, and when it does after about a month or two, you should start applying for credit again.

Credit and Visa Application
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However, this time around, you should not be applying for credit in order to max out those cards again. You should be applying for credit so that you can charge them sparingly, and pay them off right away. This will grow your available credit over time, and also improve your overall utilization ratio.

5. Apply for Credit Sparingly

This next advice may sound contradictory, based on what you just read.

It’s true that getting a new loan or credit card will increase your available credit and improve your utilization ratio. But it’s also true that every time you apply, an inquiry hits your credit report and may cause a dip in your credit score.

Credit Report Magnification and Analysis
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Yes, you read that correctly: you must apply for credit and cause a dip in your score. Then, prove that you can manage your newfound debt responsibly by hardly using it, thereby increasing your score.

Experian explains this technique as follows:

One way to reduce improve your scores is to open additional credit accounts and keep the balances very low. That will increase your total credit limits and improve your utilization ratio. But, do this well before applying for new credit to allow your history to stabilize and only if you won’t be tempted to overspend on the new accounts.

A Six-Month Plan

All of the above advice taken one piece at a time can seem contradictory, but let’s explore a hypothetical situation using all of them in the sequence of six months in order to increase your credit score.

Leading up to the credit score crash — You lost your job and used credit cards to pay expenses. You are overburdened with five maxed out credit cards at $5,000 each, for a total debt load of $25,000. You stopped paying them all for six months so they’ve grown to $30,000 with interest included and a balance of $6,000 each. You have 100% utilization and a terrible credit score of 450. As a last resort, you take out a $14,000 loan from your 401(k) and start calling creditors to negotiate.

Creditors A, B, and C accepted a 50% settlement of $3,000 each. Creditor D was tougher and accepted a 60% settlement of $3,600. Creditor E refused to negotiate. You’ve spent $12,600 to get rid of $24,000 of debt. That’s a good first step. You pay the remaining funds back to your 401(k) account. You’ve discovered that after the creditors closed your accounts, your credit score plummeted to 320. The lowest it’s ever been!

Month 1 — You have a remaining auto loan and mortgage which you make sure to pay on time every month. You have a remaining credit card from creditor five with 24% interest, but they’ve agreed to a payment plan of $200 a month and 17% interest. You also have one old empty credit card that you’ve had for years and never used. Now you start buying only groceries on that single credit card and pay it off in full twice a month.

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Month 3 — You diligently keep paying every single bill on time. You continue using the single credit card for groceries and paying it off quickly.

Month 4 — You check your credit score. It’s back up to 540 already. Almost time to expand your credit limits, but first, another month of paying bills on time and using credit responsibly.

Month 5 — You go to your bank and apply for a small personal loan of $5,000. The bank officer informs you that you have a decent credit score of 610 now, and are approved for a 14% loan. You use the funds to pay off Creditor E, but leave that credit card account open. Now you have zero rolling credit card debt counting against your credit score.

According to Marketwatch, transferring credit card debt to personal loans can boost your score by up to 100 points:

Credit card debt tends to be more damaging to credit scores than a personal loan, which is considered installment debt. The credit utilization ratio (see previous section) does not take installment debt into account. This strategy would result in zero dollars of credit card debt on the borrower’s credit report, which could boost their score by 100 points or more, says Ulzheimer.

Month 6 — In this final month, you run another credit check on yourself and discover that you’re once again sitting pretty with a credit score of 650. Well on your way toward prime-credit land.

Don’t Give Up

The reason that I know this process works is not only because the experts say it will, but because I lived it myself. It can feel like a hopeless situation when you don’t have enough money to pay all of the bills — and everyone’s slapping you with late fees and penalties.

The important thing to do is take stock of your situation and think through all of your options. There’s always an approach that will get you out of the situation, with a little bit of creativity and hard work.

Have you ever found yourself with a terrible credit score? Were you able to climb out of it? What did you notice worked best to boost your credit score? Share your experiences in the comments section below!

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  1. Hildy J
    October 7, 2016 at 8:32 pm

    One thing to keep in mind is that your credit score is meant to identify responsible credit users. Once you get your credit utilization under control, use your credit cards anywhere you can rather than paying with cash or a debit card (and pay your balances promptly).