Unless you plan to go through life paying everything in cash or crypto, you need to fix your bad credit. Bad credit and the low credit rating that comes with it reduce your ability to open a new credit card or get a loan. If you get a mortgage or car loan with bad credit, you will pay a higher interest rate than if you had good credit.
Bad credit can also affect other aspects of your life. For example, insurers, landlords, and employers may decide not to insure, rent, or hire you if you have bad credit.
Fixing bad credit takes patience and discipline, but you can do it.
How to fix your bad credit
To fix your credit, you must first know how bad it is. To do this, order copies of your credit report. From there, get any incorrect information removed from your record. Next, you need to establish a good money management record to show that you can handle credit.
Fixing bad credit is a long game. Improving your credit score takes time, and you need to maintain good habits to keep your credit clean.
Order your credit report
The three main credit bureaus in the United States are Experian, Equifax and TransUnion. Creditors, such as credit card companies and student loan servicers, tell bureaus how you track your bills. The bureaus also share information with other companies when they check your credit. You should therefore check your file with all three offices.
Fortunately, federal law allows you to see a free copy of each reporting company once every 12 months. (All three offices allow consumers to access their reports weekly through 2022 due to the pandemic.) Order them through AnnualCreditReport.com. After answering a few questions to prove your identity, you can download each report.
As well: How to check your credit score
Your credit score is calculated based on information in your credit report, and each bureau calculates it a little differently. However, your credit score is not part of your credit report. Some credit card companies provide the number to their cardholders (check your account online). You can also get your score if you sign up for an identity theft monitoring or credit score monitoring service: credit bureaus and third-party vendors offer these services.
Dispute any errors in your credit report
Check your credit file, looking for inaccurate information such as accounts that don’t belong to you, late payments you made on time, the same debt listed multiple times, and incorrect account balances. If you find errors on your report, contact the credit bureau whose report contains incorrect information. Instructions are on the credit report and you can start the dispute online, by phone or by mail.
The dispute form asks you to explain what information is wrong and you may need to provide documentation to support your claim. For example, you may need to provide a credit card statement showing that you paid the bill on time.
The credit bureau will also ask the creditor who reported the information to check their records. Ultimately, the credit bureau is supposed to correct inaccurate information, delete information it cannot verify, and keep information it has verified as accurate on the credit file. The office will not delete correct information, even if it is negative.
However, the Consumer Financial Protection Bureau reported in January 2022 that many consumers are complaining about not getting the relief they seek. The CFPB said the rating agencies provided the relief sought by only 2% of complaints in 2020, compared to 25% in 2019. The CFPB also said the most common consumer complaint is that the information in their credit report belongs to someone else, with more than 400,000 complaints falling into this category.
Work on your credit habits
Five Factors are important in determining your credit score, and you can take steps to improve your standing in most of these categories.
Payment history: This is the most important factor, accounting for 35% of the FICO score, the most commonly used credit score. Payment history shows if you’re paying your debts on time – even one missed payment can hurt your score. The most important thing you can do to improve your credit score is to pay your bills on time, by paying at least the minimum amount required. Set up autopay on all possible accounts to ensure you never make a late payment. For bills that don’t come regularly, like those from the dentist, pay them when you get them.
How much do you owe: 30% of your credit score is based on the amount you owe versus the amount of credit you have. This is known as the credit utilization rate. Keep the amount you owe within 30% of your available credit. If you have two credit cards, each with a credit limit of $5,000, you have $10,000 of available credit. To meet the 30% utilization rate, you must not have more than $3,000 combined debt on both cards. If you owe more, pay the amount and keep it under 30% going forward. Paying off old debts and paying new bills in full can improve your credit score. Many people mistakenly believe that carrying a balance helps your score.
credit history: Longer credit history leads to higher scores. If you have old credit cards, keep the accounts open, even if you don’t use the card. (If the card charges an annual fee, go ahead and close it.) Opening new accounts also shortens your average account age, which is 15% of the FICO score, so limit the new accounts you open.
Composition of credit: The scoring algorithm likes to see a combination of account types, such as revolving credit (credit cards), student loan, car loan, mortgage, etc. However, don’t open new account types just to play with the mix.
New credit: The score looks at new accounts and difficult requests that lenders make when considering extending credit to you, reducing points from your score. Taking on a lot of new credit suggests you need money, which can hurt your credit score.
Be patient. Your credit didn’t deteriorate overnight and you can’t fix it overnight. Stick to your plan and you should see improvement within a few months. How quickly you see improvement may depend on issues such as how late your accounts are and other negative information on your credit report.
How do you ultimately fix your bad credit?
The most important step to fixing your bad credit is to start paying all your bills on time. If you have overdue accounts, update them and then put them on automatic payment so you never miss another payment. Pay off the amount you owe on credit cards and loans will also help improve your bad credit.
Consider using a balance transfer card with 0% APR to consolidate your credit card debt and save money while you pay it off. Use the card only to pay off old debts and no longer accrue by loading new things into the account.
Do credit repair services work?
Credit repair services can’t do anything more than what you can do for free. A lot credit repair services are scams that encourage you to commit fraud, such as lying on loan credit applications, warns the Federal Trade Commission. You’re better off getting your free credit report, disputing all items, and spending your money on paying off the debt rather than paying for a scam repair service.
Where can I find help managing my debt?
The National Credit Counseling Foundation is a non-profit network of credit counseling agencies. Member agencies can help clients with debt issues, including developing a debt management plan that provides an affordable monthly payment.
Why is my credit score different at the three credit reporting agencies?
Creditors may not provide information to all three offices, so each agency may have different information on your file. The bureaus also use different scoring models that give slightly different weight to factors such as payment history or credit composition.
What is a bad credit score?
the FICO score ranges from 300 to 850. Generally, a score above 740 is excellent and a score between 670 and 739 is good. A score of 570 to 669 is fair and 569 or less is considered bad. Individual lenders can adjust the category ranges a bit.