How to Repair Your Credit and Maintain a Healthy Score in Six Easy Steps
Building a higher credit score is rewarding. It allows you to qualify for a mortgage, apply for credit cards and loans with lower interest rates, and get better deals on all kinds of financial products and services.
If you don’t know where to start and how to repair your credit to make yourself an appealing borrower, there are several ways to approach these tasks. Considering that credit-building can be a lengthy process, the best time to start is now.
Instead of trying to raise your score, you should analyze your credit reports and try to fix any negative marks.
The credit system is flawed in so many ways, and millions of Americans have to deal with unfair derogatory items that make them appear much riskier borrowers than they actually are. Whether you decide to do it on your own or use credit repair services, fixing your credit may be the best solution.
Read on to learn about the factors impacting your credit score, how to improve your profile, and how to maintain your creditworthiness.
What is Bad Credit?
Consumers are considered to have bad credit if they owe too much money or have a history of failing to pay bills on time. Often reflected as a poor credit score - typically under 580 on the FICO scoring system - bad credit also refers to the likelihood that a consumer won’t be able to keep up with timely payments in the future.
That’s why people with below-average scores find it hard to get approved for a loan or a credit card at competitive interest rates and resort to credit clean-up strategies.
Using a similar set of criteria, such as your credit utilization and payment history data, each different credit bureau calculates your credit score a little differently. Therefore, the numbers might vary slightly based on the agency you use.
Note that, in some cases, your reports may list negative items that don’t belong there. By law, consumers have the right to dispute any entries they consider inaccurate, incomplete, or ambiguous.
However, before you dive into error-disputing and other credit-repairing strategies, you should understand which aspects of your behavior as a consumer affect credit score calculations.
Knowing the approximate weight given to each component will help you identify the best way to build your credit and identify the areas where your score requires the most significant improvements.
Here’s a rundown of the five major components that make up a consumer’s personal credit score according to FICO:
This is an indication of how consistent or inconsistent you were with making on-time payments in the past. Of the five factors that affect your credit calculations (and credit-rebuilding efforts), payment history carries the most weight and constitutes 35% of your total score.
Based on the premise that past behavior can serve as a foundation for forecasting future spending habits, FICO takes both installment loans, such as student loans and mortgages, and revolving credit, such as lines of credit and credit cards, into account when assessing a borrower's payment history.
Outstanding Debt and Credit Utilization Ratio
Having multiple credit accounts and owing money on most of them doesn't automatically mean that you are a high-risk borrower in need of credit restoration.
It can be quite the contrary. FICO looks at your outstanding debt, which is the total amount you owe on credit card balances, mortgages, car loans, and other debts, by comparing this amount with the available credit (such as your credit card limit).
In other words, FICO cares more about your credit utilization ratio than your outstanding debt.
This factor accounts for 30% of your score, and it’s the second most important element in credit score calculations. It’s vital to maintain your credit utilization low - at least below 20%. Otherwise, lenders may label you as a high-risk borrower.
Length of Credit History
Considering that the first two factors account for almost two-thirds of your score, you should make sure to pay your bills on time and not max out your credit cards if you need to fix your credit. Still, there are a few more pieces of the puzzle to focus on if you’re aiming for an excellent score.
The length of your credit history is one of them.
Defined as the length of time between the moment you opened each of your accounts and your most recent transaction, the length of your credit history constitutes 15% of your total credit score. A longer credit history offers a clearer picture of a consumer's long-term financial habits.
If you’re looking to boost your credit score, you should start using credit as early as you can and keep your long-standing accounts open.
New credit accounts make up approximately 10% of your score. However, this doesn’t mean that you should apply for a dozen credit cards and take out multiple personal loans at once.
Quite the contrary, such behavior would suggest that you are trying to overcome a financial hurdle by requesting access to lots of credit.
Opening new accounts will inevitably lower your median account age. To simplify your credit-building journey, we suggest you apply for more credit and open new accounts only when needed.
The last 10% of your total credit score is determined by your credit mix. While this category may seem a little vague, it comes down to dealing with a variety of financial products and debt types such as mortgage loans, installment loans, finance company accounts, credit cards, and retail accounts.
Note that while consumers with a good mix of installment loans and revolving credit are generally considered low-risk borrowers, you don’t need to handle all of the aforementioned credit types.
How to Repair Your Credit in Six Easy Steps
Before you start digging yourself out of a bad-credit hole, bear in mind that the process will probably take a while. Even if you decide to work with a credit repair specialist, remember that these experts can’t wave a magic wand and erase all the bad financial decisions you’ve made in the past.
Also, beware of scams that promise quick credit fixes.
Any late payments, delinquencies, and similar pieces of information that are negative but accurate will, unfortunately, remain on your credit reports for seven to ten years. Still, there are steps you can and should take to start rebuilding your credit history and improve your score over time.
Get Your Credit Reports and Look for Errors
You can’t start the process of repairing your credit before figuring out where you stand. That’s why your first step should be getting the latest copies of your credit reports from the three major credit reporting agencies (Equifax, Experian, and TransUnion).
You can obtain your full reports for free once a year. All you have to do is visit AnnualCreditReport.com or call 1-877-322-8228. Alternatively, you can get in touch with each of the credit agencies directly.
To fix your credit, you need to start by identifying any omissions and errors on your reports. Statistics indicate that up to 25% of all credit reports contain erroneous derogatory marks, which are severe enough to result in rejected loan and credit card applications.
While managing your credit responsibly on a day-to-day basis can help improve your score, you’ll have to focus on the source of the issue if you require credit repair.
Here are some of the most common errors that you should look for when reviewing your credit reports:
- Incorrect personal information
- Missing accounts
- Accounts that you have never opened
- Inaccurate account details
- Duplicate accounts
- Incorrect public records (bankruptcies or foreclosures)
- Data management errors
- Incorrect inquiries
- Inaccurate derogatory marks or delinquencies
- Fraudulent activity
Note that certain errors may only appear in one of your credit reports. That’s why you should always make sure to check the latest copies of all three reports.
Dispute the Errors
Once you’ve completed the first step of fixing your credit and identified erroneous items on your reports, it’s time to file a dispute. After fixing what may seem like a simple error, you could see improvements in your score relatively quickly.
Fortunately, credit bureaus are obligated by law to allow you to resolve any mistakes that you find. The procedure is quite simple - you can submit correction requests online, by mail, or over the phone.
Regardless of the channel you choose, you’ll be required to provide proof of your identity, information about the questionable item, and the documentation needed to prove that it’s false.
Additionally, we suggest you get in touch with the creditor or lender that issued the account in question and let them know about the inaccuracy and the measures you’ve taken to rebuild your credit score.
The account issuer may be able to make corrections on its end, which should lead to automatic updates on all three of your credit reports.
Note that you’ll have to wait between 30 and 45 days for a response to your credit dispute letter.
Tackle Your Past-due Accounts
Disputing errors you’ve found on your credit reports won’t make a huge difference if you don’t commit to paying any overdue balances on your accounts. Given that payment history plays an important role in your credit standing, you have to tackle this issue to boost your credit score.
Ideally, all of your accounts should be labeled as “current” or at least “paid”.
What is a late payment?
Any payment that is at least 30 days past the due date is regarded as late by the credit bureaus. The longer your payment is overdue, the more of an impact it has on your credit. Your creditors may even turn your account over to a collection agency which will come directly to you to seek the funds.
Having an account sold to a collection agency can leave a substantial negative mark on your credit score. Also, given that a collection entry will stay on your report for seven years, make sure that you avoid such derogatory marks when trying to raise your credit score.
What is a charge-off?
A charge-off is one of the worst entries you can have on a credit report. It happens if you have an outstanding balance on your account that’s gone unpaid for up to 180 days. If your credit card is charged-off, it means you no longer have the option to make regular minimum payments.
Should you find yourself in this situation, your creditor will cancel your account and expect you to pay your balance in full.
It may also increase your interest rate to the penalty APR, charge you a late payment fee for each additional month that goes by, and assign your account to a collections agency. Being charged-off can significantly damage your creditworthiness.
There are no quick credit repair strategies that can help you reduce the impact of a charge-off. These negative marks typically remain on credit reports for years. However, they can be disputed if the consumer can prove that they are unfair.
Pay Your Bills on Time
Once you manage to get your payments under control and get out of debt, it’s important to show your current creditors and any potential future lenders that you’re capable of making on-time payments.
Paying off your credit card and utility bills before the due date is crucial when you’re building credit and trying to establish a reputation as a responsible borrower. The easiest way to achieve this goal is by setting up automatic payments until you get into the habit of paying your bills on time.
Increase Your Credit Limits
Your credit card limit is the maximum amount your credit card issuer lets you spend before paying it off in full next month or making at least the required minimum.
Depending on your creditworthiness and the issuer’s terms, your limit may range from several hundred to a few thousand dollars.
If you’re working toward a credit score boost, we suggest you ask your creditor to increase your credit card limit. Should your request be granted, your credit utilization will decrease, ultimately improving your credit score.
Be Careful When Applying for New Credit
While any additional credit card will increase the amount of available credit, you must resist the temptation to apply for a new one every month. Each time you submit a credit application, it gets listed on your credit report as a “hard inquiry”.
Your credit score can get damaged if you have too many of these entries within two years. That’s the last thing you need when aiming for a credit boost.
Tips for Maintaining Good Credit
Building credit is hard work. Once you’ve managed to improve your score, there are several actions you should take to honor the hard work and maintain your creditworthiness. Why is this so important?
As long as you keep your credit profile strong, not only will you have a better chance of getting approved for a loan or a credit card, but you’ll also get access to lower interest rates and better borrowing terms. Here’s what to do after you’ve completed your DIY credit repair:
Keep old accounts open. By now you probably know how important it is to maintain a long and healthy payment history. That is why you should keep older credit card accounts open even if you’re not using them.
By keeping these accounts active, you’re building your credit age and showing your future creditors that you’re capable of making regular payments.
Limit the number of hard credit inquiries. While it’s smart to keep your old accounts open, applying for new credit can be risky, especially if you need to improve your credit score.
Unlike soft credit inquiries that don’t affect your score, too many hard ones, which occur each time you apply for a credit card or any type of loan, can damage it. That’s why you should try and avoid opening multiple new credit accounts at once.
Aim for a credit mix. Repaying a car loan and a mortgage while also owning a credit card proves that you are capable of maintaining a mix of different credit types. While keeping a good mix is hardly the fastest way to build credit, it can be helpful as long as you make timely payments.
Set up automatic payments. If you can’t pay your full credit card balance, at least make sure that you make the minimum payment on time. Setting up automatic payments is easy and gives you one less thing to worry about. We suggest you do the same for your loan repayments and utility bills.
Monitor your credit score report. By now, you’ve learned how to repair credit by disputing any unfair negative items. However, the journey doesn’t end there. You’ll still need to monitor your score and review your report at least once or twice a year to make sure that no additional errors have appeared in the meantime.
Ask for help from a credit professional. While it’s true that you can do all the work on your own, the process of repairing your credit can be complicated and time-consuming, especially if you’re trying to make significant improvements. That’s why you should consider hiring a professional. Credit repair companies can help you improve and maintain your score, enabling you to request bigger and more affordable loans.
Regardless of how bad your credit score may be, you can fix it on your own as long as you put enough time and effort into the process. While asking for help from a professional credit repair service is always a good idea, a DIY approach to credit repair can be just as effective, provided that you follow all the necessary steps:
- Get copies of your credit reports from all three credit bureaus.
- Look for erroneous negative items and dispute them.
- Sort out your past debts and avoid getting charged-off.
- Going forward, pay all of your bills on time.
- Don't apply for new credit too often.
The short answer is yes. However, remember that not every negative item can be removed from your reports - just the erroneous ones. Also, keep in mind that credit score repair efforts don’t show instantaneous results, and persistence is key.
It depends on the damage to your profile. If you’ve been charged-off, that mark will remain on your reports for seven years. However, if you have just a few unfair negative items to dispute, you’ll be able to see improvements in your score within three to six months.
Either way, figuring out how to repair credit fast is tricky. There are no quick fixes, especially if you have overdue accounts, a high credit utilization ratio, and a turbulent payment history.
If you are wondering whether you should hire a credit repair specialist to help you improve your score, remember that there’s nothing a professional can do that you shouldn’t be able to pull off on your own.
Still, if you have poor credit and don’t know where to start or don’t have the time, hiring an expert is a good idea.
Efforts to repair your credit won’t cost anything if you decide to take care of the whole process on your own. If you choose to hire a credit repair company to give you a hand, you'll probably pay a monthly fee between $19 and $149.
Before deciding whether to reach out to a professional, note that credit repair services work well in certain scenarios. In other cases, you may be better off on your own - provided that your credit situation isn’t too complicated, and you have the time to learn how to repair credit all by yourself.
Albert Einstein is said to have identified compound interest as mankind’s greatest invention. That story’s probably apocryphal, but it conveys a deep truth about the power of fiscal policy to change the world along with our daily lives. Civilization became possible only when Sumerians of the Bronze Age invented money. Today, economic issues influence every aspect of daily life. My job at Fortunly is an opportunity to analyze government policies and banking practices, sharing the results of my research in articles that can help you make better, smarter decisions for yourself and your family.
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