Having a bad credit score can affect every aspect of your life. It affects how much you can borrow, what interest rates you will get, and sometimes even whether you can get a job.
Credit repair is an option often touted as a way to quickly improve your score. Unfortunately, many of the companies offering to “fix” your credit are scammy, and the rest seldom offer anything you can’t do on your own.
So, what is credit repair and how should you go about it?
What is Credit Repair?
As an umbrella term, credit repair is any steps you take specifically to improve a bad credit score. Generally, credit repair falls into two areas:
- Fixing incorrect information in your credit report.
- Changing your spending and borrowing habits so that your credit improves over time.
There is no quick solution to the latter. The former is often an easy fix, but can become complicated if you have become a victim of identity theft (this is one time when it might be a good idea to hire a professional).
Legitimate negative information stays on your credit report for seven to ten years, but that doesn’t mean that changing your credit habits now won’t benefit you even in the fairly short term.
How to Repair Your Credit: Steps to Consider
When you set out to repair your credit, there are a number of steps you can and should take. Some of these are quick and simple, others are going to take quite a bit of time.
Check, and Understand, Your Credit Report
The first step is to get copies of your credit report from all three major credit reporting companies (Experian, Equifax, and TransUnion). You need to read these reports very carefully. Reports from these companies are free (once a year), and requesting your credit report does not affect your score. This myth comes from the fact that certain checks on your credit by third parties can. Some people like to use a service that pulls all three of their credit reports into one place. This can make them easier to compare.
One thing to pay attention to is which accounts appear on your report. If you are paying bills to a utility, for example, and that account does not appear on your report, then that’s worth remembering when you have too much month for your money and have to pay something late.
You are looking for a score of between 700 and 740. Higher than that is rare, and lower than 700 is when you start getting dinged with higher interest rates.
Dispute Anything That Doesn’t Belong
You may find that there are errors on your credit report. The most common errors to look for are:
- Incorrect address, name, or phone number.
- Accounts that clearly belong to somebody else.
- Closed accounts still being marked as open.
- Being marked as the owner of an account when you are an authorized user (or vice versa).
- Incorrect date on last payment, date opened, or date of delinquency.
- Duplicate reports, sometimes under slightly different names.
- Incorrect balance or credit limit.
If you find any of these errors, you need to contact both the credit reporting company and the creditor. Your report includes instructions on how to dispute information. One way to find errors is to compare your reports from all three companies and look for discrepancies. They should be the very similar, although not the same due to differences in the models they use. An account that appears on one report but not another is something to flag.
Don’t try to dispute accurate information, although sometimes if the issue is an account that was paid as agreed still showing as outstanding or similar, it’s worth contacting the creditor and asking politely if they will get it removed.
Bring Accounts Current as Quickly as Possible
Your payment history is a huge part of your credit score. Larger debt and more recent debt hits you harder, so bear that in mind if you need to prioritize which accounts to pay off first. A good way to do this is to establish a debt budget, where you earmark a certain amount of money each month that must go to paying down debt.
For accounts that are current, make sure to keep paying on time, and always try to pay more than the minimum. Setting up a good budget can help you keep everything current. A lot of people don’t know how to budget properly, and it shows.
Learn Your Credit Utilization Rate
Another component of your score is your credit utilization rate. This, simply, is a measure of how much you owe as a percentage of how much credit you have available.
The further you stay from maxing out your credit cards, the better. You should always try to keep your credit utilization rate below 30%, across all accounts. You can reduce your credit utilization rate by:
- Paying off outstanding balances.
- Getting your credit raised or opening a new account.
Needless to say, the former is the better option, especially if you are one of those people who has issues distinguishing your credit limit from your cash in hand. A better way is to work out what the 30% utilization limit is and make sure to stay below it. Lower if you can get it. Also, make sure you know what the limits are on all of your cards and put large purchases on the card with the highest limit. Use the card with the lower limit for routine stuff that you don’t want to pay cash for, such as gas.
Reduce Your Number of Accounts
Your score considers not just how much you owe, but how far it is spread across different accounts. Because of this it can be beneficial to pay small debts down to zero…but keep that account open, even if you don’t use it. Paid-off accounts in good standing keep your credit score healthy. However, if you are going to be tempted to use that “money,” then you may be better off closing the account. Note that it’s often better to close new accounts than older ones, because of that recency thing. A credit card you have had for twenty years and always kept paid off is great for your score, so keep it even if it doesn’t have flashy rewards.
If you can’t pay off accounts, debt resolution may be an option. Or there’s debt consolidation, where you can take out another loan, use it to pay off those accounts, and then keep all of your debt in that one account. This doesn’t reduce your principal balance, but it’s often possible to get a better interest rate, especially if the debt you are consolidating is high interest consumer debt. Debt consolidation can also make budgeting easier and save you a lot of time and effort.
Be Careful With New Credit
Avoid taking out new loans until you absolutely have to. Opening several accounts in a short time can really hit your score. Don’t get tempted by those store credit cards with the amazing discounts (especially as they tend to have higher interest rates than other cards). Keep your borrowing to items you need that you can’t afford in one go, such as a newer car.
Make sure that if you are shopping around for a loan that your inquiries are grouped together. The “hard checks” done by lenders impact your score, but if they’re grouped, they only count as one check.
If you have a bad credit score, then repairing your credit will take time. The good news is, however, that it can be done, and you don’t need a “credit repair company.” However, depending on your circumstances, you might want to opt for debt consolidation or debt resolution to help you get your debts under control and reduce what you owe. For a free, no-obligation consultation to determine which path may be best for your situation, contact DebtBlue today at 855-928-0670.