How to fix bad credit
Need help with credit repair? Bad credit is one of the chief obstacles for people who can't get a home loan. You can have a decent income and money for a down payment, but if your credit is bad, you're going to have trouble getting approved. Or you may get approved, but have to pay a higher mortgage rate and make a larger down payment than borrowers with better credit scores.
Repairing bad credit usually takes a few years. You have to faithfully pay your bills every month, avoid missed or late payments, and gradually rebuild your credit history. Over time, the blemishes on your credit report will fade in importance, have less impact on your credit score and eventually will be dropped from your report entirely.
However, there is a way to repair your credit quickly – by finding and correcting any errors on your credit report that are hurting your score. That can bring your credit score up in a hurry – if there are errors to correct. But that happens more often than you might think.
You can also improve your credit score by paying down high balances on credit cards or other loans – if you're using too much of your available credit, the credit reporting agencies will assume you're stretched too thin and lower your score as a result.
Some people choose seek out the assistance of credit repair companies. But be careful - there are a lot of bad actors out there. Make sure you are dealing only with in credit repair services that offer legitimate assistance and don't promise more than they can deliver.
But credit repair is something you can do by yourself. You can check for errors on your own credit reports and have them corrected. You can work out your own plan to get your finances in order. If you need help, there are nonprofit agencies that offer credit repair assistance for free or a small charge and can show you what to do.
So how to repair your credit? Let's get started.
Credit repair companies
People who are looking to improve their credit often turn to credit repair companies. They may assume a company can do the job more quickly and effectively than they can by themselves, or that professionals know tricks of the trade that can repair bad credit in a hurry.
Be careful, though. There are a lot of businesses out there claiming to be credit repair companies that will do little more than take your money and give you nothing in return.
A legitimate credit repair service won't promise more than they can deliver. They'll work with you to identify possible errors on your credit report and may act as an intermediary with the credit reporting agencies to get them corrected. They can also help you develop a plan to improve your credit score over time by managing your debts and finances more effectively.
There's a distinction between credit repair and debt relief, though a single company will often offer both services. A debt relief company will negotiate with your creditors to try to get to write off part of what you owe. That can go a long away toward getting your finances in order. But it will hurt your credit, at least in the short run, as those debts will be reported as not fully repaid. But if that makes your debts manageable, it could help your credit in the long run as long as you stay current on your payments.
Spotting bogus credit repair services
A bogus credit repair company, on the other hand, can often make your situation worse. That's because one of their main tactics is to flood credit reporting agencies with demands to investigate negative items on your report, regardless of merit. But you can't be approved for a loan while there is an ongoing investigation into your report, so your credit is effectively frozen.
Even worse, a fraudulent credit repair or debt reduction company may tell you to stop paying your bills to "pressure" your creditors into accepting a reduced settlement, and instead pay the money into an escrow account – controlled by them! But instead settling your debt, they pocket your dough – and your credit gets even worse because your bills are unpaid.
How to spot a bogus credit repair company? The following are red flags:
- A guarantee of improved credit or a promise that they will be able to raise your credit score. No one can promise this. They can only repair your credit if there are errors on your credit report to be corrected. Otherwise, it simply takes paying your bills on time and reducing your total debt load until your score improves.
- Asking you to stop paying your bills or put your payments into a special account controlled by them.
- A demand for payment in advance. Under federal law, credit repair companies cannot charge you until they have completed the service provided.
- Ask you to make false statements about your credit accounts or activity to a credit reporting agency, or ask you to change your identity in order to start a new credit history.
- Ask you to sign a waiver forfeiting your rights under the Credit Repair Organizations Act.
If you're thinking about using a credit repair service, check them out through the Better Business Bureau and see how they're rated. You can also check with your state Attorney General's office and local consumer protection agencies to see if they've had complaints. Be skeptical of sites you aren't familiar with that offer consumer ratings of such agencies – some of them simply provide a favorable rating for a fee.
Repairing credit on your own
Most credit experts will advise you to do your own credit repair. Pretty much everything involved is something you can do by yourself. And for most of it – like identifying errors on your credit report and seeking corrections – you're the one in the best position to do it.
Those seeking to repair their credit on their own can get assistance in the form of nonprofit credit counseling organizations. These can advise you on how to go about correcting errors in your credit report and dealing with the credit reporting agencies – but they won't do it for you. They can also advise you on setting up a financial management plan that will help you pay off debt and get your loan payments under control.
Some of these services are free, some seek a modest charge after the service is completed to cover operating costs.
Again, be careful here – some for-profit operations will pitch themselves as non-profit counselors to get your business. The same red flags and precautions listed above still apply.
Steps to credit repair
The first thing you want to do is get copies of your credit reports from all three credit reporting companies – Equifax, Experian and Transunion. By law, you're entitled to a free copy once a year from all three. Use the official web site, www.annualcreditreport.com – that's the one operated by the companies themselves.
You may have to pay to get your credit scores, which are not typically included with your credit reports. However, many banks and credit cards now routinely provide your credit score from one of the three as part of your monthly statement.
Your credit report will show the status of all your loan accounts, including credit cards, auto loans, mortgages and the like. It will even show loans that have been paid off and credit cards with zero balances. It will show if you're current on your payments as well as any black marks on your record – late payments, delinquencies, defaults, etc.
Your credit report typically won't show your payment history for non-credit billings – things like rent payments, utilities, cell phone, medical billings, etc. Unless you've missed payments, defaulted or been referred to collection – those will show up as negative items.
Check all three records for errors in your credit history – particularly for negative items that shouldn't be there, like a delinquency or missed payment that never occurred. Also look for accounts you never opened – an unpaid account you don't recognize may be a sign of identity theft.
Fixing a bad credit report
If you find such errors, you need to contact both the credit reporting agency and the creditor that provided the information. You may be able to clear up the matter with a simple telephone call or email; if that fails, you'll need to follow up in writing with a certified letter to both.
Tell them exactly which information you are disputing and explain why you believe it is wrong. Provide copies of any supporting documentation you may have but DO NOT send your original copies - you'll need to keep those for your own protection. Send a copy of the relevant section of the credit report as well, with the item in question circled.
The Consumer Financial Protection Bureau recommends sending your dispute letter by certified mail and asking for a return receipt, so you can document when it was received.
The credit reporting agency is required to investigate any claim you make, unless deemed frivolous. If the company reporting the information does not reply to the inquiry or contest you claim, the item must be dropped from your report.
Improving your credit score
If you don't find any errors on your credit report, there are still other things you can do. The first is to pay down your debts so you're not using as much of your available credit. Part of your credit score is based on credit utilization, or how much you're using of your credit limits. If you've got a $20,000 limit on one credit card and you owe $18,000 on it, that's a high level of utilization. Reducing that to $2,000 or less, or even $5,000, will help your credit score.
The other thing you can do is wait. Most negative items on your credit report only stay there for seven years – after that, it's like they never happened. The exception is a Chapter 7 bankruptcy, which stays on for 10. But everything else – missed payments, default judgments, foreclosure, Chapter 13 bankruptcy – disappears after seven.
On top of that, the effect of individual negative items begins to fade after a couple years. So a delinquent loan might really pull down your score right off the bat, but won't hurt your score as much 3-5 years later.
Note that for negative items on your report, the clock doesn't start ticking until the item is resolved. So if you have a debt referred to a collection agency, the seven years don't begin until that account is cleared. Similarly, if you go into foreclosure, the seven years don't begin until the home is repossessed, not when the bank first files against you.
Don't cancel extra credit cards
It's not just enough to avoid negative items on your credit report. You need positive items as well to improve your credit score. Making regular payments on loan or credit card count as positive items. You can pay off the balance in full each month and it counts as a positive item on your report.
In fact, any account in good standing is a positive item on your report. So if you've got credit cards you don't owe anything on and haven't used for awhile, don't cancel them. Each month they remain in good standing is a mark in your favor – and the unused credit they represent helps keep your overall credit utilization low.
Your credit score also looks at the average age of your accounts. The longer you've had an account, the more it helps your credit score. So don't cancel those old department score credit cards that were the first you ever got – they're still doing you some good, even if you're not using them. The exception would be any cards for which you pay an annual fee – you don't want to pay for credit you aren't using.
Follow this approach and you should see a marked improvement in your credit scores in just a few years.