how to repair credit
Updated May 31, 2020

How to Repair Your Credit: A Step-by-Step Guide

Credit Repair

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If you have bad credit, repairing it can be an intimidating process. That’s exactly why so many people turn to credit repair services to get the job done for them. But that strategy is not always successful.

Unfortunately, there are a lot of credit repair services that charge you fees for doing next to nothing. And in a worst-case scenario, they can even make your situation worse than it was at the beginning.

As the saying goes, “If you want to get a job done right, you have to do it yourself.” And that certainly applies to credit repair.

More than anything else, it’s about learning how to repair your credit. That’s exactly what this guide will help you to do.

If you follow each of the seven steps below, and apply them consistently, you should begin seeing an improvement in your credit score in a matter of months.

But just be aware that there are no miracle cures the bad credit. When I say you’ll start to see improvement, that’s exactly what I mean – and nothing more. In truth, if you want to raise your credit score by something like 100 points, it will likely take a couple of years.

With that caveat in mind, let’s move on to the seven steps.

Step 1: Get a Copy of Your Credit Report

There are three major credit bureaus – Experian, Equifax and TransUnion. Each issues its own credit report, as well as its own credit score.

Under federal law, you’re entitled to one free copy of your credit report from each of the three bureaus each year.

You can get a copy of all three credit reports by contacting each of the bureaus:

Alternatively, the website AnnualCreditReport.com is officially authorized to provide you with a copy of your credit report from each of the three bureaus, also free of charge.

Be aware that each of the three credit reports are likely to contain at least slightly different information. That’s because not all creditors report to each of the three bureaus.

A creditor might report to two, but not all three.

Your credit report won’t come with your credit scores, so you’ll have to get those from different sources (we’ll cover that in the next section). But because the information contained on each credit report is different, your credit scores will also be different.

Part of that is due to a lack of uniform reporting as discussed above. But there are also timing differences.

Each of the credit reports may receive updated payment information from creditors on different dates, which will also affect your credit score from each.

You’ll need to order credit reports from all three bureaus to get a complete picture of your credit profile. You may also want to sign up for a paid subscription service with one or more of the bureaus that will give you access to your credit report on a regular basis.

That will allow you to check your credit to verify the improvements made are reflected on the reports.

Sign Up for a Free Credit Score Monitoring Service

As I indicated above, your credit reports won’t include your credit scores. To get those, you’ll need to go to different sources. And as luck would have it, there are several that will provide your credit scores on a regular basis free of charge.

This is critical when it comes to how to repair your credit. Your credit score may not be your credit report, but significant changes will indicate new negative information, errors, or even potential identity theft.

By monitoring your credit scores on a regular basis, you’ll know when there’s been a major development with your credit, either positive or negative.

The easiest way to get regular access to your credit scores is through your bank, credit union, or credit card issuer. Many of them provide free monthly credit scores as a customer service.

These are excellent sources because they provide your actual FICO Score, which is the one used by lenders.

If you don’t work with a financial institution that provides credit monitoring, you can sign up for services like Credit Karma and Credit Sesame. They’ll also provide free credit scores, but they won’t be FICO Scores.

Instead, you’ll get access to VantageScore, which an educational score.

Though it’s not used by banks, VantageScores use the same credit report information, and produce credit scores similar to FICO Scores. It isn’t the credit score used by lenders, but it will enable you to monitor your credit score on a regular basis and free of charge.

Still another alternative is the Discover Credit Score Card. It’s free of charge, and available to everyone – not just Discover customers.

Best of all, it provides your FICO Score updated monthly.

Step 2: The Factors that Make Up Your Credit Scores

How to repair your credit is really about improving your credit score. After all, in today’s financial world, you are your credit score.

Not only will lenders use it to decide to extend credit to you, but it will also be accessed by employers, landlords, insurance companies, and even certain utility companies. But to improve your credit score, you’ll need to understand how it works.

We’re going to focus on your FICO Score, since that’s your official score. However, there are different variations of your FICO Score.

For example, there’s one set of scores for credit cards, another for auto loans, and still another for mortgages. As such, don’t be surprised if you see different FICO Scores floating around out there.

In general, your FICO Scores are made up of five different components. According to myFICO.com, your score is determined by the following factors:

Let’s break down each of the five factors individually…

Payment History

As the name implies, this your record of paying your obligations on time.

Amounts Owed

The easiest way to explain this factor is that it measures the amounts you owe compared to your maximum credit limits (on credit cards), or the original loan balances (on installment loans).

This is where credit utilization ratio comes into play. It mostly refers to credit cards.

For example, if you have $30,000 in credit limits on five credit cards, and you owe $20,000, your credit utilization ratio is approximately 67% ($20,000 divided by $30,000). The credit bureaus like to see this ratio below 30%.

To the degree that it exceeds this level, it will have a negative impact on your credit score.

The situation is similar with installment loans. If you recently opened an auto loan, and have only made two payments, the credit bureaus don’t have much to go on in evaluating your ability to make the payments.

The higher the balance you owe, relative to the original amount, the more negatively it will affect your credit score.

Length of Credit History

The credit bureaus look more favorably on those who have longer credit histories. A recent college graduate, who’s had credit for only the past two years may have difficulty getting his or her credit score out of the 600 range.

But a thirtysomething who has had open credit for the past 15 years will get extra points just for longevity.

New Credit

This is a determining factor because new or recently opened loans or credit lines don’t have a payment history. If you have too much new credit, it will negatively affect your credit score.

You should limit new credit to not more than one or two lines per year.

Credit Mix

This factor is a surprise to most people. But the credit bureaus prefer a well-balanced credit profile.

If all your accounts are credit cards, it will have a negative impact on your score. A mix of credit cards and installment loans will improve your score. And a mortgage will improve it even more.

If you’re looking to repair your credit, focus on payment history and amounts owed. By improving those two categories, you’ll get the biggest increase in your credit score.

What’s a Good Credit Score?

FICO Scores can range from a low of 300, to a high of 850. According to Experian, which is the largest of the three credit bureaus, general categories of credit score ranges are as follows:

It’s important to understand these characterizations are only very general, and according to Experian. They’ll vary by loan sector and by individual lenders.

For example, in the mortgage industry it’s generally not possible to get a loan with a credit score of less than 620. But in the auto lending industry, a score below 650 might land you in a subprime loan.

But the chart above is still a good barometer as to which category you fit into.

Step 3: Review Your Credit Report

Once you receive a copy of your credit report, you’ll need to review it carefully. To do that, you’ll have to understand the information it contains. There are four basic categories.

Personal Information. This will include your name and any variations of it you’ve used in the past, as well as current and previous addresses. It will also include your birthdate, Social Security number, and current and previous employers.

Credit Information. Included will be information on any loans or credit lines you’ve had for at least the past seven years. The information provided on each account will include the following:

  • The name, address and (sometimes) phone number of the creditor.
  • Type of account – mortgage, student loan, credit card, etc.
  • The account number of the loan or credit line.
  • Date the account was opened.
  • Account ownership – individual, joint, or authorized user.
  • Account status – open, closed, paid, transferred, in collection, or some other description.
  • Original amount of the loan or maximum credit limit.
  • The current outstanding balance and monthly payment.
  • Payment history.

The payment history is coded. A code such as “3X30, 1X60” means you’ve had three 30-day late payments and one 60-day late payment in the reporting period.

This section will also indicate if there are any past due balances, including collections or charge-offs. Landlords, utilities, and certain other vendors may report information here, though they won’t report your regular payment history.

Inquiries. Any time your credit report is accessed, an inquiry will appear in your credit report. These have a minor negative impact on your credit score, but they only remain on your report for two years. And generally speaking, inquiries more than six months old won’t affect your score.

Public Records. This section reports legal events and obligations. That includes bankruptcies, foreclosures, judgments, tax liens and garnishments.

Step 4: Removing Errors from Your Credit Report

When reviewing your credit report, pay close attention to any derogatory information provided. This is the single biggest source of bad credit, and the richest target to improve it.

If you have any late payments, collections, charge-offs, or public records that are valid, you won’t be able to remove these from your credit report. If you come across a service that promises to have these removed, run fast!

It’s almost certainly a scam, in which you’ll pay money but get no positive results – at least none that will last.

But if you see any negative information in your report that’s an error, you can dispute it and have it removed. That will improve your credit score.

You can do this either through the creditors themselves, or through the credit bureaus.

How to Dispute Credit Errors through the Creditors

If you repair disputes directly with the creditors, they should report the corrected information to each of the three credit bureaus. However, if you go through the credit bureaus, you’ll have to enter a dispute with all three.

When disputing any credit errors, first get your documentation together. That can be used to support your claim of an error.

For example, if an open collection is showing on your report, you could have removed by producing evidence has been paid. If a late payment is reported in error, copies of canceled checks can make your case.

Though you can start the process by making a phone call to the creditor to find out proper contact information, disputes should always be done in writing. That will give you a paper trail in case there are any questions in the future.

Write a letter to the creditor stating the following:

  1. That the information reported is an error, and why.
  2. Documentation is included supporting your claim.
  3. Asking the creditor to update their records.
  4. Asking the creditor to report the corrected information to all three credit bureaus.
  5. Request written acknowledgment of the error.

Be sure to retain copies of any correspondence you receive from the creditor, whether it’s by snail mail or email. You should also keep a log of all phone conversations.

If the lender agrees that the information is mistaken, give them at least 30 days to make the corrections with the credit bureaus. If they don’t, you may need to either follow up with the creditor, or enter the dispute directly with the credit bureaus.

How to Dispute Credit Errors through the Credit Bureaus

If the creditor doesn’t report the corrected information to the credit bureaus, you may have to go to them directly. If the creditor has provided you with a letter acknowledging the error, you can simply send or email that letter to the credit bureaus.

If the creditor is uncooperative, you’ll need to provide the same documentation to the credit bureaus that you would for the creditor.

The credit bureaus will then investigate your dispute, and if the creditors fails to respond, the credit bureaus will correct the information within 30 days. This is a requirement of federal law.

You can contact the credit bureaus either by phone, by writing a letter, or by email. But email is the preferred method, since writing letters takes longer, and the credit bureaus have a deservedly poor reputation when it comes to phone service.

You can contact each of the three credit bureaus using the web links or phone numbers listed under Step 1: Get a Copy of Your Credit Report.

Step 5: Pay Down/Pay Off Debt

Under Step 2 we reported that Amounts Owed is the second most important factor in determining your credit score, accounting for a full 30% of your score. Next to removing credit errors, and generally making all payments on time, this is the next most important step.

We can break it down into three parts:

Payoff past-due balances

This includes charge-offs and collections, but may also extend to judgments and tax liens.

Judgments and tax liens are especially important to pay off because they weigh more heavily on your credit score than charge-offs and collections. This is in large part due to the legal nature of these obligations.

But while paying any of these obligations off will improve your credit score, none will disappear from your credit report for up to seven years. However, understand that a paid past-due balance is always better than an open one.

Pay down large loan and credit balances

If you remember our discussion of credit utilization and high balances on installment loans, you’ll know why this is important. The idea is to reduce the outstanding balances owed on credit lines and installment loans.

As you do, the Amounts Owed category will begin to work in your favor, raising your credit score.

And obviously it won’t be easy to pay off large balances. But you can implement a plan to gradually pay down the amounts you owe.

For example, if you can drop your credit utilization from 85% down to 60% in one year, you should experience a noticeable improvement in your credit score.

Pay off small account balances

As part of the Amounts Owed factor, the credit bureaus also look at the number of loans and credit lines where you have open balances.

If you currently have 10 installment loans and credit lines with balances, cutting the number down to five will noticeably improve your credit score. Even paying off the very smallest accounts will have a positive effect.

WARNING: When you pay off credit cards, never close out your accounts. Keeping in mind that credit utilization is based on your credit limits, you’ll need to keep those limits as high as possible. You can accomplish this by keeping those credit lines open.

Step 6: Add New Credit

Some people’s credit scores are very low because most or even all the credit they have is bad. But you can only go so far improving your credit score by cleaning up bad credit.

The other half of the credit repair equation is adding new, good credit to the mix. Your strategy will need to be to add good credit to offset the bad credit.

Eventually, your good credit will begin to overtake the bad credit, and your credit score will rise to levels you never thought possible.

There are four ways to add good credit to your credit profile:

Pay All Obligations On Time From Now On

This point should be obvious, but it’s worth emphasizing. If you have any open lines of credit, even ones that have bad histories, you can begin to turn your situation around by making all payments on time from now on.

The built-in advantage you have is that bad credit tends to “age out”. Most bad credit will fall off your credit report completely after seven years. But even within that timeframe, the older the bad credit is the less weight it has on your credit score.

For example, late payments made three years ago have much less impact than those made within the past year.

If you begin making all your payments on time starting now, your credit score will gradually rise with the passage of time.

But if you want to accelerate the process, you should add new, good credit. We’ve already covered these credit sources in How to Build Credit, but let’s do a high-altitude summary here.

Apply for New Credit with a Co-Signer

If you have bad credit, it will be difficult to apply for new loans or credit cards – at least the type with reasonable interest rates and terms. But if you add a co-signer to your application, one who has good credit, you may be able to get a well-priced loan.

This will be easier to do with installment loans, like auto loans, since they’re also collateralized. You can try with credit cards, but you probably won’t be successful.

Even though your loan has a co-signer, the lender will still report the payment history to the credit bureaus, providing an opportunity to raise your credit scores. But once again, you must be certain to make all your payments on time.

Just one or two late payments can undo all the improvement you’ve made using other strategies. As well, any late payments you make will also have a negative impact on your co-signer’s credit score.

Get a Credit Builder Loan – Or Two

If you don’t have a potential co-signer with a strong credit profile, getting a credit builder loan is the next best strategy. In fact, in some ways it’s even better.

The good thing about credit builder loans is that you can get them even with poor credit. And they’re available with mainstream lenders, like banks and especially credit unions.

Credit builder loans are fully secured, but you don’t have to put up any collateral. It works like this…

You apply for credit builder loan with your bank or credit union. They approve you for a loan of say, $1,000.

When the loan is made, the funds go right into a savings account that acts as security for the loan. You won’t have access to those funds until the loan is fully paid.

But you don’t necessarily have to make monthly loan payments. You can choose the have the payments automatically deducted from the securing savings account each month.

In effect, you’ll be taking a loan that’s self-liquidating. The only thing it will cost you will be the interest charges on the loan.

You can add that to the secured savings account, that way loan will be fully paid by the end of the term.

Along the way, the lender will report your good payment history to the three credit bureaus. This will provide you with a virtually guaranteed good credit rating.

You should do at least one of these loans, then maybe wait six months or so and do a second. It’s one of the best ways to rehabilitate your credit.

Secured credit cards

I saved this category of new credit for last because while it will help you build good credit, it can be a difficult process. This is mainly because unlike credit builder loans, secured credit cards require you to come up with the collateral for the credit line.

Similar to credit builder loans, your credit card limit will be determined by the amount of your security deposit. If you can put up $1,000, you’ll get a $1,000 credit limit. But if you can only put up $300, your credit limit will be $300.

In all other respects, secured credit cards work like regular credit cards. You can use them anywhere Visa or MasterCard are accepted, you’ll be charged interest and required to make monthly payments.

Your payment history will be reported all three credit bureaus, providing yet another opportunity to increase your credit score.

Available secured credit cards include Secured Mastercard from Capital One,
Discover it Secured, and Wells Fargo Secured credit card

Obviously, secured credit cards will only be an option if you have the cash to put up the security for the credit limit. If you don’t, then use either credit builder loans or a co-signed loan.

Step 7: Review Your Credit Report Regularly

Once you begin to see improvement in your credit scores and your credit report, it’s critically important that you continue to monitor your credit situation.

You should access copies of your credit reports from all three credit bureaus at least once each year. And just as important, be sure to monitor your credit scores on an ongoing basis.

Your credit score is something like taking the temperature of your credit profile on a regular basis. Increases in your credit scores, if only gradual, should be expected if you’re working to repair your credit.

But sudden decreases can indicate additional delinquencies, collections, legal actions, or errors. Any time you see a significant decline your credit score – say, 20 points or more – you should immediately investigate the situation.

Many free credit monitoring services will provide you with the details of derogatory information. Act on those as soon as possible.

That will mean the information will be fresh on your mind, and you’ll have quick access to any documentation that may help your case.

You can sign up for any of the free credit monitoring services listed under Step 1, or investigate others.

Final Thoughts on How to Repair Your Credit

Now that you know a good deal about your credit report, credit scores, and how to repair your credit, there’s nothing stopping you from getting started. It does require a change of thinking to go along with the various strategies.

That’s why the sooner you start, the more quickly you’ll embrace the effort and begin seeing improvements in your credit scores.

But once again, be patient! It can take at least a year of sustained credit to completely improve your credit score, and often longer you’ll get there if you don’t quit.

Kevin Mercadante

Kevin Mercadante is a freelance personal finance blogger and the owner of his own personal finance blog, Out of Your Rut.  A recent transplant to New England, he has backgrounds in both accounting and the mortgage industry.

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