Observer Content Studio is a unit of Observer’s branded content department. Observer’s editorial staff is not involved in the creation of this content. Observer and/or sponsor may collect a portion of sales if you purchase products through these links.
Having bad credit can set you up for a multitude of challenges, from loan approval to a renter’s agreement on your apartment. Understanding how your credit score works is the first step in determining how to fix your credit.
Keep your credit card in the wallet for now. We’ve done the research so you can focus on fixing your credit and hitting those financial goals on your dream list.
Getting Started With Credit Repair
Dealing with credit bureaus is a necessary evil for most people residing in the United States. For younger persons in their 20s and early 30s, their experience is sometimes lacking, leading to additional difficulties.
Do you have an outstanding credit card balance? Don’t worry; we’ve all been there. A free credit report is usually the first step when you’re new to the process. You’ll want to understand the ins and outs of credit reports, especially if your credit score needs a boost.
What Is a Credit Score?
A Fico score is an important number when it comes to managing your personal finances as an adult.
This digit ranges between 300 and 850. It provides a picture of you, as a consumer, and how you spend your money. If you’ve managed to pay your bills on time and have responsible spending habits, your score will be just fine.
It’s all based upon your history: how much debt you have, repayment scenarios, number of accounts, and more. This is what lenders use to determine if you qualify for a mortgage or car loan. These are just two examples of many where credit counts.
The higher the score, the more likely you are to make timely and appropriate payments, or that’s how they see it, at least.
How Does a Poor Credit Score Affect You?
Is your credit score above 670 or so? This is optimal. Anything below that number is a moderate result (unless you stoop even lower than 580). If you fall into the latter category, that means you have poor credit.
Credit reporting companies can make life more difficult than it needs to be. Sour credit history may affect you in numerous ways, including but not limited to:
- High-risk label: You could be labeled high risk by lenders, which means your chance to qualify for loans will be quite slim.
- Insurance premiums: Poor credit may mean your insurance premiums are higher than they need to be.
- Employment: Some employers might deny you a job based on this, as it could indicate a lack of responsibility in their eyes.
- Interest rates: You may face higher interest rates because of it.
Why Pursue Credit Repair?
Everything listed above makes for good reason to pursue credit repair. Bad credit can put a damper on big financial decisions and keep you in a ditch of debt, which you’re probably trying to get rid of in the first place.
Buying a House With Bad Credit
If your credit history drops below that moderate category of approximately 580, this will affect your ability to buy a house. This doesn’t mean it’ll be impossible, but it could come with a higher interest rate or other stipulations that can actually worsen your original financial situation.
How To Repair Your Credit: Step by Step
The best news is that it’s possible to fix your credit. It takes some know-how, but we’ve got you covered.
1. Determine Where You Stand
It’s a simple process to determine your score. Credit reports are numerous, and you can also snag a free credit report online.
Get a Credit Report for Free
You’ll find plenty of options for a free report when you open your browser. Some websites and credit bureaus offer credit reports from two to three companies, so you can see how they compare.
Know Your Credit Score
Now that you understand what the numbers mean, you’ll have a good idea of your credit picture when your report is complete.
Get a Copy of Your Report
In most cases, the company will email your report to you. It’s important to make a hard copy, though, in case you need to meet with credit counselors or a credit repair company.
2. Know What To Look for on Your Report
Your credit report will contain more than just the number.
What Information Is Displayed on a Credit Report?
Most credit reports feature the following categories.
- Payment history: Do you have late or incomplete payments?
- Credit utilization: The ratio of outstanding credit card balances to your limits.
- Types of credit: This includes open accounts, installments, and revolving.
- Credit inquiries: When an outsider checks your credit report, like an employer.
- Length of credit history: How long you’ve had credit.
3. Check For Errors on Your Report
It happens from time to time and usually in the following scenarios: personal information, reporting mistakes, debts from a former spouse, or older debts beyond seven years.
Repair Your Credit By Disputing Errors
The only way to dispute your errors is by contacting the credit report company.
4. Pay Late or Past Due Accounts to Build Your Credit
Improving your credit by paying late or past due accounts is possible. But this could take up to a few months at least to positively affect your credit score. You can’t rely on this method alone for boosting credit overnight.
5. Increase Your Credit Card Limit to Improve Your Credit Score
Higher credit scores are often due to maximum limits on credit cards, indicating that an individual is responsible enough to handle that specific amount.
If you’re not confident in your ability to handle your finances just yet, avoid this route. You could end up in a worse place, and that added stress isn’t worth it.
6. Pay New Credit Accounts First to Fix Bad Credit
Some professionals recommend that you pay new or high-interest accounts first to fix bad credit. This might help you increase the length of your credit, improving your score over time.
7. Don’t Apply for a New Credit Card
Applying for a new credit card to increase your score isn’t the best idea. It shows desperation on your part, or at the least that you’re in a financial emergency. There are other, more constructive ways to improve your credit.
8. Pay Balances on Time Going Forward
Timely payments are one of the most surefire ways to boost credit. If you’re unable to make this happen, you’ll want to call the companies responsible for the particular payment lines you’re struggling to pay. That way, they can advise you on the best scenario to avoid disrupting your credit even further.
This could include a new repayment plan, for example.
DIY Credit Repair FAQs and Tips
Those that are new to the game of credit repair will have questions, and here we cover the most common topics to round out the critical steps you need to take.
Do-It-Yourself Credit Repair Versus a Credit Repair Company
Fixing your credit yourself versus contacting a company or counselor is possible with a little know-how. Options include making payments on time, paying off your high-interest installments first, and minimizing lines of credit until you’re in a better place.
Other ways to help improve your credit include:
- Limit hard inquiries: Mortgages, credit cards, or loans qualify as “hard inquiries” or “hard pulls” and indicate financial trouble. Keep these at a minimum.
- Use auto-payments: You won’t have to worry about missing payments. This system can help you improve your spending habits, too.
- Keep old accounts open: These boost your credit as it shows a longer history on your report.
- Stay on top of your credit report: Most bureaus recommend running a credit report once per year. Keep your files and note your progress.
What Is the Credit Repair Organizations Act?
The CROA, or Credit Repair Organizations Act, protects you from companies trying to misguide you into a poor financial decision.
It prohibits businesses from using misleading or untrue representations of a credit agreement. The act also requires clear disclosures from credit repair businesses, so you’re not taken advantage of there, either.
When Do Debt Collection Agencies Get Involved?
Typically, it takes anywhere between three and six months of nonpayments for a debt collection agency to get involved. This depends on the stipulations laid out by the lenders and creditors, but your account has to be listed as “very delinquent” or something similar first.
How Does “Pay-for-Delete” work?
“Pay for delete” is a practice used by debt collection companies. It’s when your collection amount is erased from your credit report because you made the payment in full.
How Long Does It Take to Repair Credit?
How long it takes to repair credit depends on your financial state and what’s involved. Issues like disputes and errors may take three to six months to get resolved.
Other outstanding credit issues can take years to clear. Seven years is a popular marker for credit reports because this is the length of time required for credit details to be wiped clean from your report.
Recap on How To Fix Your Credit
Credit repair is possible. The most important factor is understanding your score and increasing it for a better financial future. Take advantage of free reports and make your timely payments. Auto payments help, as does spending within your means. The best credit repair companies can help you fix your credit score.
Credit Repair Final Thoughts
It’s normal to worry about your Fico score and credit bureaus, given all the facets of life this seemingly minor number can affect. A credit card, in and of itself, isn’t a bad thing, but poor spending habits can make it a beast of a burden.
Repair your credit yourself by making all your payments on time, keeping old accounts open, and checking your score at least once per year. Contact a professional if you have any doubts; that’s why they’re there.