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How to Repair Bad Credit
By Victor Rosario MONEY RESEARCH COLLECTIVE
Maintaining good credit requires a concerted effort, but recovering from bad credit is even harder. Late payments, bankruptcies, and identity theft can lead to a low credit score and create serious financial problems that might seem impossible to overcome. Bad credit can cripple your ability to be approved for credit cards, student loans, auto loans and other forms of credit.
The good news is that there are ways to make major credit history progress without breaking the bank. Let’s talk about how to build a good credit score, including how to interact with credit reporting agencies, obtain a free credit report, use credit repair services to your advantage, and create a better personal financial profile.
Table of Contents
What is credit repair?
Credit repair is the process of improving your credit history. It involves both dealing with negative entries in your credit history and avoiding any additional negative entries by keeping your current credit accounts in good standing.
One vital part of credit repair is fixing errors in your credit record, which are more common than you may think. A Consumer Reports investigation found that 34% of Americans have at least one error on their credit report. If you’re part of that cohort, that kind of inaccurate negative information could be affecting your credit score and impairing your ability to get loans at the best interest rates.
There are two ways to fix these errors: you can hire a credit repair company or do it yourself.
What do credit repair companies do?
Credit repair companies work directly with the three major consumer credit bureaus to fix errors and submit disputes on your behalf. This can be helpful to debtors who are intimidated by the process and don’t know where to start. This assistance, though, comes at some cost, which can be tough for people who are already facing some financial hardship.
The best credit repair companies offer money-back guarantees, straightforward pricing models and credit monitoring. There are also online platforms that provide you with all the tools needed to submit your own claims.
How to repair your own credit
If you’re willing and able to put some work into it, you can remove inaccurate items from your credit report yourself. The basic process involves two steps: get a copy of your credit report and file disputes of any erroneous entries with all three consumer credit bureaus (Equifax, Transunion, and Experian).
To help you manage your debts and bills, institutions such as the National Foundation for Credit Counseling provide free counseling to help you lower interest rates regardless of credit score, consolidate bills into one smaller monthly payment and pay off your credit card debt faster.
How to repair bad credit
Although fixing errors on your credit report could be all you need to return to good standing, most cases will need a multi-tier approach to get your credit on the right path again. Be prepared: that process can take a considerable amount of time. Here’s what you will need to get started.
Step 1: Assess your financial situation
It’s important to be sure where you stand financially so you can make informed decisions. Annualcreditreport.com is authorized by the Federal Trade Commission to provide free credit reporting annually from the big three consumer credit bureaus. Due to the COVID-19 pandemic, these companies have committed to providing free weekly credit reports through the end of 2022.
Depending on what your credit report tells you, you may also want to check your credit score. Although it’s true that a hard inquiry by a prospective creditor can lower your credit score by up to five points, checking your own credit score counts as a soft inquiry, which does not directly affect your score.
Step 2: Make a payment plan
It’s important to start paying off your outstanding debts as quickly as possible, as this will lower your interest payments and improve your credit usage ratio. Paying off your high-interest debts first is colloquially known as the avalanche method while paying off your smallest loans first is called the snowball method. The former helps you pay less interest in the long run, but it might not always be feasible, while the latter could help you motivate yourself to keep your payments up to date.
Making a choice between those two will involve assessing your own debt situation. Do you have any debts that have gone to collection agencies? Have you been the victim of a major credit scam? How diligent are you about making absolutely sure you make your payments on time? What is your credit utilization ratio (i.e., the percentage of your credit limit you are actually using) on all of your outstanding accounts?
The answers to those questions will inform your choice of which plan to use to pay off your debts. You may also want to check if you qualify for a debt consolidation loan. There are companies that provide loans for bad credit, though you should only take this step if doing so will reduce your total interest payments.
Step 3: Create financial consistency
This is really what your credit score and report reflect. It may be the hardest step to take, but it’s a critical one. When considering how to build credit fast after a credit slump, you may want to swear off credit cards altogether, but using credit cards wisely and paying them off quickly can be key components in maintaining a low credit utilization ratio.
After you’ve paid off your debt, you might consider applying for a credit builder loan or solicit a secured credit card, both of which have less stringent requirements and can help you shore up your credit score.
