Bad credit score is an aftermath of late payments, missed payments, maxing out credit cards and borrowing much more than you can handle. It’s based on information that’s been reported to credit bureaus by companies, like credit card issuers and lenders, you have financial accounts with.
Bad credit limits your chances of getting approved for the better things of life. Lenders perceive you as a risky borrower and are less willing to deal with you. Fortunately, you can follow this step-by-step guide to repairing your bad credit.
Start With Your Credit Report
Before you can get started, you have to know what you need to repair. Your credit report contains all the information that’s contributing to your bad credit. This could be past due accounts, debt collections, high credit card balances, or public records.
By law, you’re entitled to free credit reports from each of the three credit bureaus each year. This yearly free credit report is available only through AnnualCreditReport.com. You can also order by phone or mail if that’s more convenient.
There are a few other situations where you’re entitled to a free credit report:
- You’ve been turned down for credit because of something on your credit report in the last 60 days
- You’re currently receiving government assistance
- You’re unemployed and planning to look for a job soon
- You think you’ve been a victim of credit card fraud or identity theft.
These free credit reports should be ordered directly through the credit bureaus.
Paying for Your Credit Report
If you’ve already used up your free credit reports for this year, you can order your credit reports directly from the credit bureaus or myFICO.com for a fee. The bureaus all offer a three-in-one credit report that lists all three of your credit reports side-by-side. The three-in-one credit report costs more than a single credit report, but less than the combined price of purchasing your individual credit reports.
Review Your Credit Reports for Errors | Repairing Your Bad Credit
Read your credit reports thoroughly, checking for things that may be inaccurate. It may be a lot to digest, especially if you’re checking your credit report for the first time. Take your time and review your credit report over several days if you need to.
Become familiar with the information in each of your credit reports. Regardless of where you’ve ordered your credit reports, they’ll all contain:
- Your personal identifying information
- Detailed history for each of your accounts
- Public records like bankruptcy and tax liens
- Inquiries from companies who have pulled your credit report
Deciding What Needs Repair
Here are the types of information you’ll need to repair:
- Incorrect information, including accounts that aren’t yours, payments that have been incorrectly reported late, etc.
- Past due accounts that are late, charged off, or have been sent to collections.
- Maxed out accounts that are over the credit limit.
It’s good to highlight or underline each type of information in different colors to help you make a credit repair plan.
You’ll take a different approach for each type of information. Highlighting in different colors save time re-reading your credit report each time you’re ready to make a payment, call a creditor, or send a letter.
Dispute Credit Report Errors | Repairing Your Bad Credit
You have the right to an accurate credit report. You can dispute any information in your credit report that’s inaccurate, incomplete, or you believe can’t be verified. When you order your credit report, you’ll receive instructions on how to dispute credit report information. Credit reports ordered online typically come with instructions for making disputes online, but you can also make disputes over the phone and through the mail.
The Best Method for Credit Repair Disputes
Disputing online is faster and easier, but outside of screenshots you take, you won’t have a paper trail for the process.
Sending your disputes by mail has several advantages. First, you can include proof supporting your dispute, for example, a canceled check showing you made a payment on time. You can also keep a copy of the dispute letter for your records. Finally, if you send your dispute via certified mail with return receipt requested — which you should — you have proof of the date you mailed the dispute. This is important because credit bureaus have 30-45 days to investigate and respond to your dispute.
You might end up sending several dispute letters. Save a credit report dispute template on your computer that you can modify for different disputes and different credit bureaus. This will save you time and keep you from writing a new letter from scratch each time.
Credit Bureau Dispute Alternative | Repairing Your Bad Credit
You can send your disputes directly to the bank or business who listed the information on your credit report. They have the same legal obligation to investigate your dispute and remove inaccurate, incomplete, or unverifiable information from your credit report. Disputing directly with the information furnisher is necessary for errors that the credit bureaus “confirms” are accurate.
What Happens After a Dispute
If the dispute is successful and your credit report is updated, the bureau will make the change, alert the other credit bureaus, and send you an updated copy of your credit report.
On the other hand, if the item isn’t removed from your credit report, your report will be updated to show that you’ve disputed the information and you’ll be given the opportunity to add a personal statement to your credit report. Personal statements don’t affect your credit score, but can provide additional insight into your dispute when a business manually reviews your credit report.
Tackle Past Due Accounts | Repairing Your Bad Credit
Payment history impacts your credit score more than any other factor — it’s 35 percent of your score. Since payment history is such a large part of your credit score, having several past due accounts on your credit report will significantly hurt your score. Taking care of these is crucial to credit repair. Aim to get past due accounts reported as “current” or “paid.”
Get current on accounts that are past due, but not yet charged-off. A charge-off is one of the worst account statuses and happens once your payment is 180 days past due.
Accounts that are delinquent but less than 180 days past due can be saved from being charged-off if you pay the total past due amount. Beware, the further behind you are, the higher your catch up payment will be.
Contact your creditor to discuss options for bringing your account current. Your creditor may be willing to waive late penalties or spread the past due balance over few payments. Let them know you’re anxious to avoid charge-off, but need some help. Your creditor may even be willing to re-age your account to show your payments as current rather than delinquent, but you’ll have to actually talk to your creditors to negotiate.
Pay Charged-Off Balances
Pay accounts that are already charged-off. You’re still responsible for a charged-off balance. As they get older, charge-offs hurt your credit score less. However, the outstanding balance will make it hard — and sometimes impossible — to get approved for new credit and loans. Part of your credit repair must include paying charge-offs.
If you pay a charge-off in full, your credit report will be updated to show a $0 balance and a “Paid” status. The charge-off status will continue to be reported for seven years from the date of charge-off.
Another option is to settle charge-offs for less than the original balance. With a settlement, the creditor agrees to accept the lower payment and cancel the remainder of the debt. The settlement status will go on your credit report and stay for seven years.
Take care of collection accounts | Repairing Your Bad Credit
Accounts get sent to a collection agency after they’ve been charged-off or become delinquent for several months. Even accounts that aren’t normally listed on your credit report can be sent to a collection agency and added to your credit.
Your approach to paying collections is much like that for charge-offs, you can pay in full and even try to get a pay for delete or you can settle the account for less than the balance due. The collection will stay on your credit report for seven years based on the original delinquency.
Bring High Credit Card Balances Below Their Limits | Repairing Your Bad Credit
Your credit utilization — a ratio that compares your credit card balances to their credit limits — is the second biggest factor that affects your credit score. It’s 30 percent of your score. The higher your balances are, the more it hurts your credit score.
Having maxed out credit cards costs affects your credit score badly. Bring maxed out credit cards below the credit limit, then work to pay the balances off completely. Credit card balances less than 30 percent of the credit limit are better for your credit score. Below 10 percent is ideal.
Loan Balances and Your Credit Score | Repairing Your Bad Credit
The closer your loan balances are to the original amount you borrowed, the more it hurts your credit score. Focus on paying down credit card balances first because they have more impact on your credit score. Then, reduce your loan balances.
Past Due Accounts vs. High Balances
You probably can’t pay down your balances and your past due accounts all at once. Focus first on accounts that are in danger of becoming past due or charged-off. Get as many of these accounts current as possible. All of them if you can. Then, pay down your credit card balances. Third, work on accounts that have already been charged-off or sent to a collection agency.
Get New Credit
After you’ve resolved the negative items on your credit report, work on getting positive information added. Just like late payments severely hurt your credit score, timely payments help your score. If you have some credit cards and loans being reported on time, continue to keep those balances at a reasonable level and always make your payments on time. If you don’t have any open, current accounts, you’ll have to start over with new ones.
Where to Get New Credit
Past delinquencies can keep you from getting approved for a major credit card so limit your credit card applications to one, at the most two, until your credit score improves. This will minimize credit inquiries, which are added to your credit report each time you make a new application for credit. Too many credit inquiries hurt your credit score and your ability to get approved for new credit. Inquiries remain on your credit report for two years but only affect your credit score for 12 months.
If you’re denied for a major credit card, try applying for a retail store credit card. Also, consider a secured credit card which requires you to make a security deposit to get a credit limit. The security deposit makes the secured card a little tougher to get, but a secured card from a major processing network is better than a retail credit card.