5 Steps to Repair Bad Credit
5 Ways to Repair Bad Credit Yourself
The very first step you need to take to repair bad credit, is to focus on paying all of your bills on time. At the same time, begin reducing credit cards and other loans you may have. Using certain credit building tools may help too.
It’s a lot tougher to repair your bad credit than it is starting to establish new credit. You’re now in a more difficult position of trying to convince credit card issuers and other lenders that you can be an acceptable credit risk.
Even though you’ve messed up before and got behind on your payments, you have to convince them that you will do everything in your power to change your ways.
Getting a good starting point is very important. Apply for a free copy of your credit report and score from www.AnnualCreditReport.com. Review the report carefully, making notes of unusual or questionable entries.
There is some good news though. Maybe your credit score isn’t as low as you thought. Or maybe there’s a blatant error in one of the entries.
You should start your review by looking for any errors made by one of your creditors. If this happened, your score could be improved substantially. Having been a victim of identity theft could be another reason to dispute an item.
More recently, if you received a deferral on paying a credit bill, or had forbearance due to Covid-19, you need to make sure it was reported correctly to the credit bureaus. When in doubt, dispute the item until you’re sure it’s correct.
Equifax, Experian, and TransUnion, are providing free credit reports on a weekly basis until April, 2021. This will give you a chance to review your credit report more frequently as you try to repair bad credit yourself.
Dig deep in the credit report and look for addresses, accounts, and even amounts that are not known to you and dispute them if you believe they are in error. Be absolutely sure that all information is correct.
After you’ve done that, consider using our 5 steps as you learn how to repair bad credit:
Then consider these five basic strategies for rebuilding credit:
Pay every bill on time
If you’re short on cash, it’s okay to pay the minimum payment on credit cards. You also have the option to contact the credit card issuers and try to have them forgo interest for a period of time or even to lower the rate of interest.
The reason for this is when you are trying to repair bad credit, your payment history affects your credit score the most. It’s critical to make every payment on time.
Bad credit, i.e., late payments, will remain on your credit report for the next seven years. That’s a long time to recover from some credit mistakes.
Do your best to not max out any cards, stay below the limit
This item is number two in importance when trying to repair bad credit. The credit bureaus have a term that they use to define the percentage of your approved limit. It’s called “credit utilization.”
Most financial experts say that you should never go over 30% of the card’s approved limit. The lower it is, the better. Review your credit report and see which cards are over this limit. Cash permitting, make higher payments on those to bring them down.
When your credit card issuer reports a lower outstanding balance, it could have a positive effect on your credit score. Those previous high balances don’t penalize your score after the balances have been reduced.
Use a secured credit card if necessary
Sometimes when you have bad credit, the card issuer won’t let you use the card for any more purchases. When that happens, a secured credit card can be helpful in establishing a payment pattern.
Just be sure to get one from a company that reports all activity to all three major credit bureaus.
Consider a secured loan or a credit builder loan
This step uses a credit building method many individuals aren’t aware of. The single purpose of this is to help you to improve your credit profile. The institutions that do this type of “lending” are mainly credit unions and small community banks.
You still have to prove to them that you have the income and ability to repay the loan. What usually happens is that the lender holds all payments on the loan until the entire amount is repaid and then releases it back to you.
For the secured loan, you can pledge a savings account or a CD, and oftentimes, a marketable security as collateral. As you make the payments on time, the institution reports it to the credit bureaus, and it can improve your score. Making even one payment late on these types of loans can damage your credit, so pay on time!
Find a co-signer
This is easier said than done, I know. Sometimes a family member or a parent can co-sign for a credit card or a loan. However, the co-signer (s) must be made aware of the responsibility they will undertake.
If you, the borrower, doesn’t pay on time, the card issuer or bank WILL come after the co-signer to pay. It could also create problems for the co-signer if they had to apply for new credit because the co-signed debt counts against them on their credit profile.
There are many horror stories around where a grandparent was asked to co-sign their grandchild’s student loan. “What could go wrong,” they ask. Ten years later, the kid graduates from college, lost his job, and is delinquent on the student loan. No one remembers the loan was co-signed.
The bank sends a certified letter to the grandparents demanding full repayment of the loan balance, not just the monthly payment. What happens to the grandparents when they can’t come up with, say $75,000 to repay the loan???
Does it take long to repair bad credit and rebuild anew
Well, it all depends on how big the problem is, and when it happened. Starting with late and/or missed payments, could remain on your credit report for seven years. If the problem was severe and there was no good way out, and you filed bankruptcy, it will show for up to ten years.
No matter what the situation is, you need to start now and not wait for a better time. As soon as some positive information is reported to the credit bureaus, you should see an improvement.
Plan your strategy carefully as to how you plan to rebuild your credit score. The key is to monitor your results on a regular basis to make sure you’re on the right track. As you repair your bad credit, it’s helpful to see your effort is paying off.