How to Repair Bad Credit
Living with bad credit is a reality for millions of Americans and credit repair can feel impossible. Having bad credit can negatively affect you throughout your entire life in ways you’d never think.
Did you car break down beyond repair and you need a new one? Unless you have $20,000 lying around, you’ll need to apply for a loan. Potential lenders will pull your credit to determine if you are a risk worth taking. Do you need to get utilities turned on in your name? Utility companies check your credit to determine whether you’ll need a security deposit. Or maybe you’re moving to a new apartment. Your landlord-to-be will check your credit to determine if you pay your bills on time. If you’re not on time with your other bills, what will make them think you’ll pay rent on time.
What is Bad Credit?
Credit scores range from 300 at the lowest end, and 850 being considered the highest credit score achievable. The average American has a credit score of roughly 700. This is considered to be a “good” score. Most lenders will approve you for loans at a fair interest rate.
But not everyone is perfect; I’ve had my own struggles with credit in my life. According to Experian, one of the three major credit reporting bureaus, 16% of Americans have a FICO® score below 580. A range of scores that lenders consider to be “very poor.”
That’s over 52 million people.
Why Should I Pursue Credit Repair
It’s nearly impossible to find a traditional lender willing to loan money to someone with very poor credit. Lenders use your credit score and credit report to determine whether or not you’re a risky borrower. This category of borrowers are far more likely to default on their loans, or not pay them back.
But getting better rates on loans and other credit products isn’t the only reason to repair your credit – Employers seeking to hire people for management roles or positions in charge of company finances will pull credit reports. Someone who can’t properly manage their own finances can’t be expected to successfully manage the company and its money.
Or perhaps you’re considering starting your own business. You might think you could get away from your credit history by working for yourself. Many entrepreneurs require loans to get their business off the ground. You’ll need to purchase or lease a space to operate your business, and buy equipment for the business. All these may require credit.
DIY Credit Repair
There’s no reason you can’t Do-It-Yourself when it comes to credit repair. You may see companies all over the place advertising how they can raise your credit score for you, but it comes at a price. There’s nothing that a credit repair company can do to boost your credit score that you can’t do yourself for free.
How Do I Repair My Bad Credit
Obtain Your Credit Report
The first step is to request your credit report. Looking at your credit report can be painful. Trust me, I’ve been there. I’ve looked at the page full of my financial mistakes and felt completely embarrassed. Being honest with yourself and understanding what we need to fix. This is how we begin the journey to good, strong credit.
You are entitled by law to a free copy of your credit report every year. Your free credit report can be accessed through AnnualCreditReport.com. Do not trust any other source that claims to provide you a “free credit report.” They will typically be missing information or will require you to pay
Read through your credit report from each of the bureaus. They will each list the negative terms that have impacted your credit score. Payments you’ve missed, debts you’ve defaulted on, multiple hard credit inquiries. Figure out where you went wrong.
Other Methods to Get a Free Credit Report
In addition to the annual free credit report you receive through AnnualCreditReport.com, the Fair Credit Reporting Act (FCRA) affords you the right to request your credit report for free if you fall into one of these circumstances:
- You’ve applied for credit and have been denied due to something listed on your credit report. You have 60 from the date of denial to request a copy of the report from the lender that denied you. But you have to request it; it is not sent automatically. The lender will mail you a notice with contact information for the bureau from which they received your credit report.
- You’re currently receiving public assistance.
- You’re unemployed but will apply for a job within the next 60 days.
- You are the victim of identity theft and you place a fraud alert on your file.
- You are disputing information listed on your credit report.
Requests for your credit report under these circumstances should be made directly through the credit bureaus.
You also have the ability to request your credit report through the credit bureaus whenever you would like. However they have the ability to charge you a fee for this service. Experian and Equifax have moved towards providing you with a free copy of your report several times throughout the year upon request. At the time this article is published, Transunion still requires you to pay for additional credit reports.
Review Your Credit Report for Errors
Now we need to sit down and decipher the information on your credit report. It can be intimidating to look at, especially if you have a long credit history. But it’s important to understand everything listed on it.
Your credit report lists your personal identifying information, a detailed list of each account you’ve opened, any bankruptcy that you’ve filed, and inquiries made to your credit report.
What Needs Fixing?
There are multiple items on your credit report that we need to look at to improve your score.
- Maxed out accounts – revolving credit accounts (think credit cards and other lines of credit) where you’ve spent most or all of the credit available to you without paying it back immediately.
- Past due accounts – Late payments, charged off accounts, or accounts sent to collections
- Incorrect information – Anything that should not be on your credit report
The first thing we want to look at are any inaccuracies on the report. This includes payments that were reported late but were actually paid on time and accounts that don’t even belong to you.
A 2012 study published by the Federal Trade Commission showed that nearly 25% of Americans identified errors on their credit report that may adversely affect their credit score
Disputing Errors on Your Credit Report
Don’t wait to report the errors you find. The sooner we can identify them and dispute them, the faster your credit score will improve.
Send a Letter to the Credit Bureau
Dispute items on your credit report by sending a certified letter. You have the ability to dispute information on the credit bureaus’ websites, however it’s important to have a paper trail to document the steps you take in case something falls through the cracks.
Provide them with your contact information and explain to them in detail what is incorrect and why. For help in crafting your letter to the credit bureaus, the CFPB has fantastic templates you can use. You can also enclose proof if you have it when you submit the dispute through the mail.
Make sure to keep copies of everything you send in as part of the dispute.
And once again, make sure you send the letter through certified mail. Yes, it does cost a little bit extra, but you want to be able to track your letter and make sure it gets to its final destination without any issues and confirm that someone signed that they received the letter.
Should I Contact the Furnisher as Well?
For certain inaccuracies, it may benefit you to contact the furnisher (the person who provides the information to the credit bureaus) to request they correct the information themselves. Again, contact them and explain the issue and enclose documentation to back up your case.
However if it’s an issue of identity, it’s best to let the credit bureau sort it out.
Check the Results of the Investigation
The credit bureaus have usually have 30 days from receiving your letter to investigate the dispute and verify the information with the furnisher. They then have 5 business days to inform you of the results of the investigation.
They will mail you a letter detailing the results of the investigation whether it went in your favor or not, as well as a free copy of your credit report if the dispute resulted in a change.
Be sure to check your credit report again after a few months to verify that the disputed information has fallen off the report.
Get to Work on Those Past Due Accounts
Did you know that payment history is the single largest factor in determining your credit score? It accounts for 35% of your credit score. So it only makes sense that this is a big focus when looking at credit repair.
Get current with your past due accounts. Make sure they get paid and listed as current before they become charged-off.
Charged-off accounts are terrible for your credit. They are accounts that are more than 180 days late, and they take a long time to disappear from your credit report.
Delinquent accounts that are not yet charged-off can be saved by paying the balance owed in full prior to the 180 day mark. Make every effort to pay. Contact your creditor ASAP and work with them to pay back what you owe. Many creditors may offer you payment arrangements or other options to get back on track to avoid charge off. They would rather work with you to collect the debt willingly than send it to a collection agency or simply write off the bad debt.
You still must pay charged-off accounts. They will not go away until after the debt has been satisfied. Get to work on paying the debt off in full. This is a major part in your road to credit repair.
Once it has been paid in full, the account will be updated and listed as paid. Unfortunately, the charge-off remains on your credit report for seven years.
You may also decide to settle the debt by both parties agreeing to accept payment for less than the total amount owed and calling it quits. The settlement is listed on your credit report and takes seven years to fall off.
Check out our tips to Paying Off Debt for more help.
Pay Down those High Account Balances
Things like credit cards and other lines of credit that are maxed out reflect poorly on your credit report and can make credit repair difficult. You’ll need to make more than the minimum payment to bring these balances down to an “acceptable level”.
Credit card balances that are below 30% are looked at favorably when calculating your credit score. Below 10% is even better. Credit utilization accounts for 30% of your credit score so take it seriously.
Get Some New Credit
Now that we’ve looked at our past mistakes, let’s look to the future. It’s not enough just to correct what we’ve done. Now we want to establish a positive credit history moving forward.
Open a new account. Consider opening a new credit card. Major credit card companies might balk at the sight of your credit score, but don’t fret. You still have options.
Many banks offer products geared towards people with poor credit to help them get back on track. This may be a regular credit card but with a lower balance to avoid accumulating more debt you can’t afford.
Or if regular unsecured credit cards aren’t an option for you, look out for secured credit cards. These cards require you to put down a security deposit in exchange for a line of credit of the same amount. It works like a normal credit card, but if you stop making your payments, your creditor can close the card and keep the security deposit to pay off the debt.
Using one of these products responsibly will show willingness to pay and will help towards a new start for your credit. The same way that late payments hurt your credit, on-time payments boost your credit score.