Finding out you have bad credit is hard for anyone. Maybe you found out when you needed credit for an emergency car repair or hospital bill. Perhaps you found out when you were denied a home rental or a car loan. Maybe you just know that with all your late and missed payments your credit is bad and you haven’t even requested a loan because you know you would be denied. No matter how you found out your credit was bad, it likely was a stressful and embarrassing situation and everyone deals with differently. There is a common thread sewing everyone with bad credit together, though, and that is the need to get their credit back on track.
While having bad credit can definitely negatively impact your life, it doesn’t have to be that way forever. The good news is that there are things you can do immediately to begin repairing and rebuilding your credit. Even better, the steps to rebuilding your credit are things you can do for yourself. Some of the steps along the credit rebuilding process are quick and give you instant results but others will take some time. Fixing bad credit is definitely a process and it is unrealistic to expect it to be instant. But, no matter how long it takes you to complete the steps, simply starting on the journey to better credit will help you build habits that will help you maintain your good credit once you get it.
Here are ten steps you can follow to rebuild and repair your credit. We have numbered the steps to make it an organized plan you can easily follow, and you can take them just as they are lined out. If it is easier for you to use these steps in a different order, that’s fine, too. It doesn’t really matter much which step of the steps you take first, it only matters that you get started. Pick the easiest step for you to begin with. When you see how effective following the plan is, it will give you the confidence boost and knowledge you need to keep going and fix your credit.
Step One: Find Out What Is Lowering Your Credit Score
To understand why your credit is bad, you need to know what your credit score is and what is on your credit record. Getting a copy of your credit report will help you see what issues are giving you problem credit. A credit report is an exhaustive record of your credit accounts, repayment history and other factors that help lenders, creditors and prospective employers or landlords decide on your credit worthiness. In fact, it may surprise you to learn how extensive it is and how long items stay on your credit report. Bills or charges you may have forgotten about may be behind your bad credit. Here’s how long negative items on a credit report are reported:
Late payments: 7 years from the late payment date
Foreclosures, shorts sales and repossessions: 7 years
Tax liens: 7 years after they are paid
Charge offs: 7 years from the date of the charge off
Judgements: paid judgements, 7 years and unpaid judgements remain on your record even longer
Collections: 7 years and 180 days from date of delinquency of the debt
Bankruptcies: 10 years from the date of filing
Chapter 13 bankruptcies: 7 years from filing date
As you can see, credit reports hold long term grudges and you need to know what it’s holding against you. It’s easy to get a copy of your credit report, because checking your own credit does not leave a credit inquiry on your record. If you applied for a loan or credit card and you were declined credit, by law, you are entitled to request a free copy of your credit report. Simply contact the credit bureaus listed within your rejection letter to request a copy of your credit report. If you were not denied credit but need to know if your credit is bad, you have a right to request one free copy of your credit report per year. If it has been a while since you have applied for credit or reviewed your credit report and you are unsure about your credit standing, you need to request a copy to get an accurate representation of what your credit report and score look like now. Getting your free credit report is as easy as writing a letter of request to the credit bureaus or visiting a website for free credit reports and filling out the request.
Once you receive the credit report, go through it carefully and thoroughly. If you find any inaccuracies or missing information, your next step should be to fix those errors. Correcting errors in credit reports is one of the quickest and easiest ways to positively impact your credit score, so that should be your next course of action.
Step Two: Scrub Up Your Credit
Once you have combed through your credit report, the next step is disputing any errors you find. To make a dispute, you will need to write a letter outlining your issue to each credit bureau. In most cases, credit bureaus have thirty days to respond to your dispute but in a few rare instances, they can take up to forty five days. It is important you write a letter of dispute to each credit bureau as simply fixing it with one won’t fix it with the others.
Just as you have to contact each credit bureau in writing, you have to write an individual dispute letter for each inaccuracy you find. One letter outlining multiple errors will not do the job, each error needs its own individual letter sent to each credit reporting bureau. If this seems too overwhelming, a credit counseling service or attorney can write the letters for you. If you hire someone, make sure they are not making unrealistic claims like “we’ll repair your credit overnight!” Or “we’ll get you a credit improvement of over 200 points!” because, quite simply, that is not going to happen. It takes time to fix credit problems, but correcting errors is certainly a great place to start and can have a positive impact on your credit score.
Step Three: Start Establishing Some Positive Credit
Being denied credit from one creditor doesn’t mean all your credit options are off the table. If you have credit problems because of a spotty repayment history, the way you’ve used credit or because you lack a credit history, getting a new credit card and using it wisely can help boost your score.
It may seem counterintuitive that credit card companies would give credit to people with bad credit, but in an effort to help people fix credit problems, they offer what is known as a secured credit card. Secured credit cards require users to open their account with a deposit. The deposit is used as the credit card’s spending limit and if bills are late or unpaid, the credit card company can access the deposit and use it to cover the charges.
Using these cards wisely by not charging up to your full spending limit and paying bills on time is a smart and effective way of establishing responsible use of credit. While secured credit cards often have a lower spending limit and higher interest rate than traditional cards, when used wisely they can help you establish a positive credit history that will increase your score.
Step Four: Make A Budget And Stick To It
If you have credit issues, it likely means you have budgeting issues and have been spending more than you can afford. Even if you haven’t been hitting the town and living the high life, overspending of any sort can take a huge toll on your ability to make payments on time or even just to make the minimum monthly payments at all.
Overspending also leads to an imbalance of your credit to debt ratio, the amount of credit you have been extended versus what you have used. Lenders look for a credit to debt ratio that shows responsible spending and repayment. Being close to maxed out or completely maxed out on your credit cards and other loan accounts signals to lenders you haven’t got things under control financially.
To get an accurate idea of what you can comfortably spend and repay, a budget is crucial. Start your budget by reviewing your tax returns from the last two years. This should give you an accurate picture of what you realistically take home each year. Next, subtract all your recurring monthly expenses like rent or mortgage, car payments, student loan payments, utilities and other non negotiable monthly expenditures. Then, estimate expenditures for gas, food, entertainment and other common expenses. Now, create a limit to what you can spend on each category and try to spend even less than that. For example, if you budgeted $200 for entertainment, try to spend less than that by hosting people for pot luck dinners and game nights in your home rather than going out for movies, dinner and drinks. If you budgeted $500 for food and groceries, try to spend less than that by buying generic items, using coupons and store loyalty cards and sticking to a planned list rather than succumbing to impulse buys.
If at the end of the month you have successfully spent less than you budgeted, use the leftover money for your budget to pay down your debts. Creating and sticking to a budget can help you make dramatic improvements in your spending habits and show lenders you know how to manage your money and credit lines responsibly.
Step Five: Be On Time All The Time
As you learned, late payments stay on your record for seven long years. Late payments are a major red flag for lenders, so being on time with your payments is critical to fixing bad credit. Moving forward in the process of rebuilding your good credit, you must pay every bill on time, every time. No exceptions!
If you have trouble remembering your payment due dates, set up automatic bank drafts to take care of things automatically. If automatic draft isn’t a good option for you, set up payment reminders on your phone or see if your bank has a text or email reminder option you can opt into using your online banking account. Don’t let a poor memory for dates make you late on your payments. Use technology to send reminders or take payments out for you so you will never forget a payment date again.
If you are behind on your bills, get them caught up as soon as possible. Make payment arrangements if necessary, but get caught up and stay current as soon as you possibly can. Making payments on time is the single most important factor in your credit score and your credit will not improve as long as you continue to make late payments.
Step Six: Pay Down Credit Card Balances
If you have cards with outstanding balances, work on paying those down as soon as possible. Funnel any money you have left over in your monthly budget to paying down debts, or better yet, make cuts in your budgeted monthly expenses where you can and use that money to pay off your debts.
Debts are analyzed by ratios and the lower your debt to credit ratio, the better off your credit score will be. As an example, a card with a $1,000 limit and a balance of $500 is at a 50% debt ratio while the same card with a balance of $1,000 is at 100% of its debt ratio. Paying these ratios down will help balance your debt to credit ratings and positively effect your credit score by showing you have more credit available than you have used.
Once you pay the credit cards off, keep them open. Even if you owe and charge nothing, your total available credit affects your score and having available credit is a indicator you know how to use credit wisely. Keeping your paid off credit cards open also helps you establish a long credit history that reflects positively on your credit record.
Step Seven: Avoid Unnecessary Credit Inquiries
When you’re trying to save money, it can be tempting to take merchants up on their store credit card offers. Many merchants will offer you a discount off of your purchase if you agree to applying to open one of their store’s credit cards. While you may save a few dollars on that purchase, your credit takes a hit when the merchant runs a credit check to determine your eligibility.
Each credit history inquiry is indicated on your credit report as a “hard inquiry” and having frequent inquiries adds up and deducts points from your credit score. Further, numerous credit inquiries indicate you are likely spending outside your means, making you a high risk customer for creditors. Avoid seeking credit you don’t need and that isn’t going to help you reach your goal of establishing new, good credit simply to save 10% off of one purchase when you apply for the card.
To make it even easier to avoid seeking credit you do not really need but may be offered and tempted by, you can put yourself on the pre-screened credit and insurance opt out list so you won’t receive offers of credit by mail. Your can opt out for five years by calling 1-888-5-OPT-OUT or online at www.optoutprescreen.com. You can opt out permanently by visiting the same website and filling out the Permanent Opt Out Election form. If you decide to opt back in later, you can visit the same website or call the same number and request to opt back in.
Step Eight: Focus on Paying Off Debt Instead of Moving It Around
Should you take out a new credit card just to do a balance transfer? This can help you slash the interest you’re being charged every month. But do it wisely: Don’t move your debts from card to card in an effort to balance out your debt to credit ratio or to clear a card so you can close it. Transferring credit card debt around usually comes with additional fees and charges and if you close a card you transferred balances from, your credit history is shortened. Additionally, owing the same amount of money but on fewer open cards or accounts can have a negative impact on your score.
Focus on repaying your debt instead of shuffling it around. Pick the card with the smallest amount owed and pay more than the minimums to get it paid down quicker. Once you have that one paid off, use the money you spent every month paying it added to the minimum payment of your card or loan with the next lowest debt load. Continue this snowballing method until all your cards are paid off. Paying off small cards quickly gives you a sense of accomplishment and makes it easy to see how you can make progress by tackling debt strategically rather then playing the never ending game of credit card and debt shuffle.
Step Nine: Get Help If You Need It
Is the thought of facing your bad credit by yourself too daunting to allow you to get started? Are you so far behind on your bills you see no way you will ever catch up, no matter how diligently you make payments? Are you having trouble simply making ends meet each month? Or, have you tried to follow a few of the steps to rebuilding credit but find it hard to stick to your plan? If you’re answering “yes!” to any or all of these questions, you need to know help is available and then reach out for it, wisely.
Start with your local library to see if they offer free financial counseling or know of another nonprofit organization in your area that provides free counseling. If a free option is not available, you can get the help you need from a reputable credit counseling or debt relief company.
Hiring a credit counseling or debt relief company can be a smart way to get help dealing with your debt, but there are some things you need to consider before signing on with a for-profit credit counseling or debt relief company. Before you sign up, make sure you are aware of these pros and cons:
Pros
*Your interest rates will go down when creditors are contacted by the company working for you.
*Fees will be waived.
*You will make just one monthly payment to the company that they will disperse to creditors as agreed. This makes juggling payments a thing of the past.
*You may be able to avoid bankruptcy but still have that option should you need it.
*Your debt is self managed. Your company will automatically draft your monthly payments from your account as agreed and send it along. You have no more due dates to deal with, it is all taken care of for you.
Cons
*You give up the ability to open new lines of credit once you enter into credit counseling or debt relief programs.
*It can take up to a month before the program kicks into gear. This means if you don’t make double payments the first month, one to your original creditors and one to the debt relief company, you will get more late marks on your credit record. It also means stressful collection calls and letters may continue until your counseling company makes your first payments.
*Your credit score may drop initially. This can be because of the con we just discussed or because creditors close your account while you are in counseling and this erases any good history you had with the account.
*Unless they are truly a nonprofit, fee-free service, you are paying for services you could do on your own. With patience, honest communication and tenacity, you can work with your creditors to get better interest rates, waive fees and make payment arrangements. Creditors know it is in their best interest to help you reach an agreement so you can continue to make monthly payments. They know bankruptcy means they will never recoup the money so they will work with you to negotiate payments. In essence, any monthly fee you pay the company will be money you could put toward the debt if you did the work yourself.
Every situation is unique and there is absolutely nothing wrong with asking for credit counseling and debt relief help. Just make sure you avoid predatory monthly fees and working with companies who make false claims like getting items removed from your credit, improving your score overnight or other promises that are too good to be true. It takes time and dedication to fix credit problems and reputable debt relief organizations will always be upfront about that.
Step Ten: Be Patient And Consistent
Repairing and rebuilding your credit will take time. It will not, and cannot, be done in thirty days, overnight or any other outlandishly short period of time, no matter what a for-profit credit counseling service may say. No one can get items removed from your report before their established reporting time is over, and no one can instantly fix your credit problems.
The only way to fix credit problems is by taking a proactive approach and budgeting yourself, sticking to your budget, paying every bill on time every time, paying down your debts until they are gone, and — going forward — using the credit extended to you responsibly.
While it takes time to improve your score, with each month that you make your payments on time and chip away at the debt, you will see your credit score improve and you will have a much firmer grip on your financial stability and well being. Be patient with yourself, stick to your budget and consistently pay on time, and your efforts will be rewarded with great credit you have earned. Better yet, after repairing your credit using these steps, you will have the tools, knowledge and experience you need to protect and keep your good credit rating.
