Forget Dunkin’ Donuts. America runs on credit. If you and everyone else had to come up with hard cash whenever you bought something—from a donut to a duplex—the national economy would curl up into the fetal position and start sucking its thumb.
Maybe the craziest thing about credit: In most cases, you can’t be thrown in jail for failing to repay what you owe. (The U.S. got rid of debtors’ prisons a long time ago.) Instead you’ll see your credit score hit the floor. And that’s a big deal.
That score, assuming you have one at all, falls between 300 and 850. Your goal is a score above 700, says Erin Lowry, founder and author of the personal finance blog Broke Millennial.
Everyone from credit card companies to employers will check your credit history for red flags. If your credit sucks (or you don’t have any) your ability to rent an apartment, pay the minimum for insurance, or comfortably inhabit the modern world will be severely compromised.
So how do you fix yours if it’s crummy?
KNOW WHERE YOU STAND
If you’re not doing this already, you need to start regularly checking your credit report—at least once a year, Lowry says. To do that, visit AnnualCreditReport—a government-mandated site sponsored by the three major credit agencies.
Unlike all those “free” credit report sites you see advertised, AnnualCreditReport doesn’t sell your info to lenders—so you won’t get bombed by credit card and loan offers.
If you’ve never opened up a credit card or bank account, and have never had student loans or even a cell phone bill—basically, if your parents have always paid for your stuff—it’s possible you may have no credit. In most cases, this is just as damaging to your purchasing power as having bad credit.
In either case, knowing your baseline is the first step to fixing the problem.
PAY PAST-DUE DEBTS FIRST
Whether it’s a cable bill or a student loan payment, you want to pay off your delinquent debts ASAP, Lowry says. Your credit score is only going to go in one direction—down—until you fix those past-due payments or debt obligations.
MAKE YOUR MINIMUMS
If you have outstanding credit card debt, cell phone bills, or loans, focus on hitting the minimum monthly payments. If that’s not possible, reach out to your credit card company or lender before your payment is due, Lowry advises. They may be willing to tweak your payment plans in ways that prevent your credit score from taking a hit.
PRIORITIZE CREDIT CARD DEBT
Some guys focus on paying off one segment of debt at a time. For example, you may funnel all your cash toward paying down your student loans, even as your credit card debt balloons. That’s a mistake.
Of all the debt you may be carrying, maxed-out credit cards are probably the most damaging to your score, Lowry says. In fact, your credit score gets dinged if you use more than 30% of your card limit. Keeping it below 10% is best for your score, she says.
So if your card has a $5,000 limit, you don’t want to use more than $1,500 of it—at most. That’s true even if you pay off your card in full every month.
DON’T CARRY A BALANCE
If you’re able, pay your monthly credit card bills in full. It sounds obvious, but some guys buy into the long-standing myth that carrying a little debt from month to month can help their credit score—so long as they’re making regular payments and hitting minimums. They’re wrong, Lowry says.
DO NOT OPEN NEW LINES OF CREDIT
Another misconception: Believing that the key to fixing bad credit is opening up new credit cards, or taking out new loans, and making those payments on time. That’s not going to counteract your other bad debt, Lowry says. “You can achieve an 800 credit score with just a credit card,” she says. Again, focus on paying off or paying down the debt you already have, rather than opening new lines of credit.
TALK WITH DEBT COLLECTORS
If your credit stinks because you have unpaid bills piling up, your creditors may have sold your debts to collectors. “A collection agency buys your debt, for a fraction of the cost, and then hounds you for payment in full,” Lowry explains. If collectors are bugging you, call them to talk about your re-payment options. They may be willing to take less—and so lift your debt burden—because they bought your debt at a discount.
IF YOU HIT ROCK BOTTOM…
If you have no credit, or your credit is just abysmal, you may not qualify for a traditional credit card. Lowry suggests applying for a “secured” credit card. “You’ll be required to put down a refundable deposit”—say, a couple hundred bucks—“in exchange for your credit card,” she says. Whatever you put down becomes your credit limit.
Once you have that secured card, use it very sparingly. Again, you don’t want to use more than 30% of your limit—and ideally you’ll use less than 10%. Lowry suggests setting up an automatic credit card payment for something cheap, like your Netflix subscription. Then set up another automatic payment from your bank account to your secured credit card to cover that Netflix expense. Stick your card in a drawer and ignore it, and you’ll slowly start to strengthen your credit score, she says.
No matter how deep the hole, you can dig out in a few years. Get started now, and in five years you can buy a nice house, finance a new sports car, and have fun shit-canning your credit all over again.