How to Repair Bad Credit

How to Repair Bad Credit
GUIDE
Steven Tumulski
By: Steven Tumulski
Posted: June 28, 2013
BadCredit.org's popular "How-To" series is for those who seek to improve, rebuild or better understand their subprime credit rating.

Whether you’ve made some bad decisions or simply fell on hard times, finding yourself with a bad credit score is always a bummer.

Thankfully, your score is based on a system that allows you to systematically improve your situation.

Put the steps in this guide to use and you’ll be able to get out of your bad credit slump.

1. Do these things the right way.

If you’re looking for immediate results, you’re going to be rather disappointed. Getting your credit in good shape takes time.

With that being said, you can do these things immediately to start the process of repairing your credit score.

  • Pull your credit reports.

The first step to repairing bad credit is figuring out exactly where you stand.

Start by pulling your report from all three credit bureaus — Experian, Equifax, and TransUnion. You can do so for free by visiting annualcreditreport.com.

  • Review your report for inaccuracies and have them corrected.

Recent studies performed by the Federal Trade Commission have shown one in four Americans have erroneous entries on their reports leading to a decreased credit score.

If you spot any, report them to the respective bureau by visiting the appropriate site.

It’s worth noting you can even dispute reports that aren’t technically erroneous. It’s a common strategy employed by credit repair specialists.

If you find an old account that’s closed or marked as charged off, file a dispute and see what happens.

According to the policies of each of the major credit bureaus, if the dispute isn’t responded to, the entry will be removed from your credit score entirely.

Disputing inaccuracies and old accounts can result in a quick boost of 50 points or more on your credit score.

  • Stop using your credit cards.

One of the factors used to determine your credit rating is your debt-to-credit ratio. If you keep your cards maxed out, then you’ll never improve it and your score will remain the same.

By putting your cards away and avoiding them, you’ll start to improve this ratio and your score.

  • Set up a payment reminder system.

It doesn’t matter if you use a calendar in your kitchen or an automatic online system. You need to establish a way to remind yourself of when your bills are due so you can pay them on time.

Whatever system you choose, be sure to stick to it faithfully so you don’t undo all the hard work you’re about to go through.

“The first step to repairing bad credit is

figuring out exactly where you stand.”

2. The long-term strategy.

Now that you’ve taken care of the easy stuff, it’s time to implement the long-term strategy that will really pay off.

You’ll need to understand how your FICO score is calculated to make sense of the following tips, so here it is:

  • Payment history: 35 percent
  • Amounts owed: 30 percent
  • Length of credit history: 15 percent
  • New credit: 10 percent
  • Types of credit used: 10 percent

New credit and types of credit used account for very little, so this guide won’t focus on them much.

However, your payment history, the amounts owed and the length of your credit history all add up to a whopping 80 percent. These are the areas that cause most people grief.

  • Don’t close your accounts.

One mistake many people make when trying to fix their credit is paying off old balances in full. It’s a faulty idea based on the assumption that doing so will eliminate the negative marks from your score.

It’s better to keep these accounts open for a few reasons:

  1. The older the account is, the more it helps your credit score.
  2. Showing a positive payment history boosts your score.
  3. Keeping the account open and paying down the balance improves your debt-to-credit ratio.

Furthermore, your most recent history is weighted more heavily than your old payment history.

So if you had a bad year and missed a lot of payments, they’ll impact your score less and less with each new, on-time payment made.

Closing the account won’t allow the system to correct the problem. Instead, it will lock it into your credit report for seven years. This will show the account was settled, which still hurts your score.

  • Open new accounts strategically.

Opening a new account could have a negative effect on your credit score. Opening several of them will definitely lower it.

However, there are some types of accounts that can help you improve your score.

For instance, taking out a secured personal loan with your local credit union will not only show you’re able to make timely payments, but it also helps improve the types of credit used.

This strategy does have a small cost in the form of interest payments, but you can minimize them rather easily.

Simply take the money received from your personal loan and stash it in a high-yield savings account.

You’ll earn a moderate amount of interest on it, helping to offset the interest charges accumulated from the loan.

After paying on it for 10 to 11 months, you’ll finally have to come up with cash out of your own pocket to wrap everything up. You’ll have increased your score noticeably in that time.

As long as you fulfill your obligation, you’ll also receive your security deposit, allowing you to start the process over again if you choose to.

  • Use a credit score simulator.

Who can help you understand how certain decisions you make will impact your score better than the bureaus that report them?

While it does come with a slight cost (around $10 a month), the Equifax credit score simulator allows you to see how certain activities will impact your score.

For instance, you can see what would happen if you open a new account, close an account or continue making payments on time for the next 12 months.

Even better is the ability to choose your target credit score and have the system provide recommended actions.

When your score is low (below 650 or so), it will come up with great suggestions.

Once you hit that threshold, it tends to tell you to “keep making payments on time.” This might not seem very helpful, but it definitely tells you when you’re on the right track.

  • Other types of loans can help.

When you have bad credit, you’re going to have to pay high interest rates on all sorts of loans. The easiest of these to get is an auto loan.

As long as you have enough equity when buying a new car, you’re virtually guaranteed a loan — regardless of how bad your credit score is right now.

Sure, you may have to pay outrageous amounts of interest, but the consistent payments showing on a large account will have a drastic positive impact on your score.

You can always refinance the loan once your score improves, which will help boost your score even further while saving you some serious money.

3. A summary.

  1. Pull all of your credit scores.
  2. Review your reports for errors and dispute them.
  3. Dispute closed accounts that report delinquencies.
  4. Stop using your credit cards, but don’t close the accounts.
  5. Setup a payment reminder system.
  6. Use secured personal loans.
  7. If possible, use a high-interest auto loan or mortgage payment.
  8. Use a credit score simulator.