Having bad, or subpar, credit can make a lot of things difficult, nearly impossible, or more expensive to obtain.
For example, a lot of insurance companies will charge higher rates, you’ll get unfavorable terms in loans, and you may have to provide higher down payments if you’re stuck with less favorable credit.
Each credit score model is different but for the most part, anything under 625 is subject to more scrutiny.
The only way to improve your credit score is to fix your credit. There are many ways to repair your credit or fix issues with your credit. You don’t always have to hire a service to do so, but they can help.
The truth is, there is nothing a credit repair service company can do that you can’t do yourself. The key difference is that they already know the steps to take to repair credit and work through bad credit situations.
If you’re not hooked – learn how you can fix your credit below.
How to Fix Your Credit
There is no “get rich quick” scheme to fixing your credit. The steps to fix credit issues outlined below are nearly the same for everyone but some may focus on certain areas over others. If you follow the outlined steps below you’ll be able to turn your credit history from negative to positive fairly quickly.
Steps to Fixing Credit
If possible, the following steps should be done in order. It is possible to jump around, for example, reducing utilization before paying of delinquent debts, however, we suggest following the order as it will heighten your chances of seeing an improved credit score in as little time as possible.
Review Credit Reports
Your credit report is your financial report card grading your financial history. The first thing to do when trying to fix your credit is to pull your credit reports and understand what your credit score is.
It’s good to know that your credit score and credit report are different.
There are several services that allow you to get your credit score, for free, like Credit.com, Credit Sesame, and so on.
If you request your credit report from any of the three credit reporting bureaus (Experian, Equifax, TransUnion) they won’t include your credit score.
You’ll want to make sure you have your report from each of the three bureaus as each one will have different information to review. It’s also good to be aware of each since each lender pulls different ones and you’ll never know which one gets pulled so it’s very important to keep them all up to date and clean.
Fix Credit Report Errors
Now that you’ve read your credit reports and understand the information being presented, it’s time to get the errors fixed.
The process of fixing errors on your report is most known as credit repair. You can do all of this on your own or hire a professional credit repair service to help. It doesn’t matter the route you take because the end result is hopefully the same, you’ll see an increase in your credit score. The key is to not wait and to start repairing your credit as soon as possible.
If you do find errors on your report, you can dispute them with each of the bureaus.
Pay Delinquent Accounts
Your payment history is the most important factor when generating your credit score. It’s pivotal that you maintain a good standing with your accounts.
Your payment history can make up to 35% of your credit score, depending on the scoring model you use.
A single late payment can drop your score dramatically. Any “negative mark” on your credit can stay there for 7 or more years.
- Late Payments
- Short Sales
- Tax Liens
If you currently have any accounts that are behind in payments or delinquent, you’ll want to tackle those right away. However, don’t ignore the accounts you have in good standing.
You should focus your efforts on the accounts in good standing and then whatever you have left financially you start to chip away at the accounts that are not in good standing.
Along with your payment history, your credit utilization is a major factor in your credit score and holds a substantial weight in the calculation.
Your payment history and credit utilization make up around 50% of your score. It’s not secret you want as low of a utilization as possible but you don’t want it to be non-existent.
You can easily figure out your utilization by taking your current debt(s) owed and dividing that by your total credit limit.
For example: If you have a $5,000 credit card and you have used $2,500 then your utilization will be 50%.
It is best to keep your utilization under 30% but it’s best to keep it lower, if you can. Keeping it between the 10-15% range is the ideal range to improve your score. By having your utilization at 30% or lower you’re telling creditors that you can manage your finances.
In order to reduce utilization you should continue to lower your good standing debt while focusing on the high-interest debt that’s holding you back. You’ll want to keep chipping away any extra money you have to lower this overall debt.
The process to reduce utilization:
- Continue paying accounts in good standing.
- Start paying off high-interest debts to open up more money for other accounts.
- Start paying off high-balance debts to reduce overall utilization.
If you’re dead set on reducing your utilization you’ll have to pay more than the monthly payment. Creditors structure their loans, credit cards and other credit services so that they make money. If you only make the monthly payment, depending on the type of credit lended, you’ll either never pay it off completely or it will take a substantial amount of time to do so.
If possible, we suggest you pay 2x or even 1.5x your monthly payment so that more money can go to the principal balance. The more you’ve paid off the less you’ll pay in interest in the long run and the more your minimum payment amount will go towards the actual balance and not the creditor’s pockets.
Increase Lending Limits
During this time it’s usually not good to continue adding accounts until you’ve gotten your credit in check but adding new credit can be almost just as good as the above steps.
A way many people lower their utilization while they are paying off their bills is to add more lines of credit, typically in the form of credit cards. For example, if you have a credit limit of $1,000 with a utilization of 95% (you have $950 in debt) and you add a credit card with a credit limit of $1,000 (making you have $2,000 total for a credit limit) your utilization will immediately drop to around 50%.
Not only can increasing your credit limits help, but if you did add a new account like a credit card then making on-time payments and keeping that account in good standing can help you just as much as paying off your other bills if lenders go to review your credit report later on.
Credit Repair Services
A credit repair service can be a company or a 3rd party program that you use to help repair your credit, monitor your profile and build your financial future.
These services typically come with a fee. The fee charged is different based on services and the state you’re in. Under the Credit Repair Organizations Act, credit repair companies are not allowed to take an advanced fee and are only able to charge for services rendered and that charge typically doesn’t come until after they’ve gone through the dispute process.
The companies will work with the credit bureaus and your creditors to challenge any negative information on your report. In many cases they will work with your creditors to reduce total debt owed or a payment plan. They strive to ensure that your credit history is up-to-date, accurate and honestly represents your financial history.
For example, if you’ve had a collection account on your credit report and it has been sold to other debt collectors then it may show up multiple times on your report which is unfair. The debt is fair but having it on your report multiple times and reporting against your credit score isn’t fair. A credit repair company can help find this information, identify the businesses and handle the dispute.
A Federal Trade Commission (FTC) study found that 1 in 5 people have an error in their credit reports. Around 80% of people who dispute errors on their credit report are successful in removing them.
A good credit repair service or credit repair company will do the following:
- They will pull your report from each bureau.
- They will identify potential errors and work with you on supporting documentation.
- They will work with the bureaus alongside the investigation to determine if the dispute has reason.
As we’ve said before, you can do all of this on your own. The only time you should really utilize a credit repair company is if you simply don’t have time or don’t understand all of the requirements.
Similar to doing it yourself, it will take up to 30 days and sometimes up to 45 days using a credit repair service to see any response from the credit bureaus.
Credit Repair Tips
There is a lot of advice out there on how to rebuild your credit or even repair pieces of it.
Keep these tips in mind while you continue to work on your credit score:
- Salvage. You shouldn’t sacrifice a good standing account for an account that isn’t in good standing.
- Dispute reports sparingly. If you dispute too much at one time it could look fraudulent and the bureaus are less likely to work with you.
- Do not close credit cards. You should never close a credit card, even in bad standing. If you close a card with a balance it will hurt you more than it being late on payment.
- Learn what hurts your credit score. Stay on top of what hurts your credit score and how you can stay away from negative marks.
- Don’t watch your score like a hawk. Rebuilding your credit takes time and won’t happen overnight. Just keep making payments and getting your finances in a better standing and your score will come back relatively fast.
- Don’t be afraid to ask for help. If you are really stuck or not sure how to approach your debts, reach out to consumer credit counseling services.
- Don’t be ashamed of bankruptcy. If you have exhausted all other efforts and bankruptcy is the only way to get your finances back on track, don’t hesitate to file. This is a last resort method. You should try everything in your power before filing bankruptcy.