How to Improve a Credit Score Below 500

Having a credit score below 500 may make it difficult to get a loan, rent an apartment or even pass the application process for a job. CNN/Money cites Beth Givens, director of the Privacy Rights Clearinghouse, who says, "Ideally, you want your score to be well above 620---that's a drawing line for creditors." Causes for ending up with low credit scores include identity fraud, illness, disorganization in paying bills and letting debt creep up on you. To raise your credit score, make a financial plan and stick to it.

Instructions

1

Get copies of your free credit reports from each of the three major reporting agencies through the Federal Trade Commission. Print your reports. Check your personal information and employment data for accuracy. Read the key that describes how the payment history is reported.

2

Check for identity fraud. Look at all the accounts listed and compare them to the statements you have. They should match up. If there are accounts that you never opened, dispute them immediately and file a fraud alert with the credit bureaus. Consult an attorney for any identity theft situations that can't be cleared up through the credit union reporting systems.

3

Look at the "Adverse Accounts" category. Determine whether these are your legitimate debts. If you find that you've paid off a debt and it was never recorded, contact the credit bureau to request that it be removed. Supply copies of your proof.

Go over the accounts that are truly your debts and find out why they're considered a problem. Make a document with two columns. In one, put accounts with late payments; in the second, put accounts in collections.

4

Make a monthly budget based on your monthly bills and the information in your credit report. Start with mortgage or rent payment. Approximate utility payments and type in those. Add monthly minimums on all your credit accounts, including the ones that have been late. Add 5 percent of the total balance to each monthly minimum. For example, if you owe $1,000, pay the $20 minimum payment that is requested and then add $50, for a total payment of $70. This is just a guideline, but it's best to always pay something over the minimum payment.

5

Add up your total monthly income. Subtract from it all the payments you're making so far. Remember to add in true necessities like food and transportation costs.

If you have a negative balance at that point, you need to come up with more income or try to negotiate with creditors. Tell them that, due to illness, job loss or whatever other reason, you're no longer able to fulfill your obligations as you have been. It's possible that a creditor will stop interest and lower monthly payments until you're back on your feet. Go in with the attitude that you want to do what's best for everyone concerned. Revise your budget to include these new arrangements.

6

Analyze your revised budget for extra money that could be put toward past bills. If there is extra money, contact credit card, medical, utility and lending institutions where you have accounts in collections. Offer to pay something each month until the balance is paid off.

Make your final budget. Stick to the budget as much as possible. Write down beside each budgeted item how much you actually spent on that item that month so you can better gauge it for the next month.

7

Go to a nonprofit credit counseling service if you're not able to reduce your debt on your own. The counselor will help you get interest dropped, payments reduced and collections stopped. The downsides are that this can affect your credit report, and you may have to give up all your credit cards. The biggest advantage is that your credit score will go up if you hang in for the long haul.

8

Keep a few accounts open and manage those accounts well after you have paid off your credit card and loan debts. Creditors like to see that you're able to handle credit before they give you more.

MSN Money quotes credit expert Emily Davidson, who says, "The most important aspect of your credit scores is the debt-to-limit ratio." That means you need to have available credit beyond what you're using.