How To Rebuild Bad Credit
If you’ve fallen behind on your bills, defaulted on a loan or filed for bankruptcy, chances are your credit has taken a serious hit. Multiple negative marks on your credit history can lower your credit score and make it more difficult for you to obtain new loans. Even if you’re able to find a lender who is willing to offer you credit, you’ll most likely end up paying a hefty interest rate. Fixing bad credit takes time and knowing what steps to take can help you to get back on track financially. Here are some helpful tips on how to rebuild your bad credit.
1. Understanding Your Credit Score
Before you can begin rebuilding your credit, you need to understand how your credit score is calculated and what factors can cause it to go up or down. While there are several different credit score lenders you may choose from to evaluate your credit-worthiness, FICO scores are most widely used. The FICO score, developed by the Fair Isaac Corporation, measures five specific factors in determining your credit risk. These factors include your payment history, the total amount of debt you owe compared to your available credit, the age of your accounts, the number of inquiries made for new credit and the types of debt you owe.
Your payment history accounts for the largest percentage of your credit score so having multiple missed or late payments on your report will cause your score to go down and it also makes you look less responsible to potential lenders. One of the easiest things you can do to begin repairing bad credit is to simply pay your bills on time. Most banks offer online bill payment services and you can set up automatic payments or monthly reminders to help you stay on schedule. If you need help creating a budget or bill-payment system, you can seek the assistance of a non-profit credit counseling agency in your area for additional guidance and advice.
2. Managing Debt
If you’re carrying a significant amount of debt, this can also cause your credit score to go down. This is particularly true if you have numerous debts that are delinquent or have been charged-off. Your credit score is based in part on how much debt you owe versus the amount of available credit you have. If your credit cards or lines of credit are close to or at the credit limit, your score will suffer and lenders may perceive that you have trouble controlling your spending.
Managing your debt requires that you stop using credit to make unnecessary purchases and you begin to aggressively repay what you owe. If you’re only making the minimum payments on your debt, you’re not likely to make much headway, especially if your debts are all at higher interest rates. As you pay your credit cards down, don’t close the accounts right away. Having older accounts on your credit history actually improves your score but closing them can cost you some points.
3. Cleaning Up Your Credit Report
The federal Fair and Accurate Credit Transactions Act (FACTA) and the Fair Credit Reporting Act (FCRA) offer consumers some specific rights when it comes to their credit report. Under the Fair and Accurate Credit Transactions Act, you’re entitled to a free copy of your credit report each year from each of the three major credit reporting bureaus (Experian, Equifax and TransUnion). The Fair Credit Reporting Act protects your right to know what’s in your credit report and how that information is used. The FCRA also outlines the steps consumers can take to dispute inaccurate or incorrect information contained in their credit report. (To learn more about how to correct inaccurate information on your credit report, see How To Fix A Credit Report Error.)
If you believe that your credit report contains false or incorrect information, you must send a letter to the appropriate credit reporting agency in order to initiate a dispute. The letter must contain your name, address, the information you’re disputing and the reasons why you believe the information is incorrect. The credit reporting bureau is required to investigate the dispute within 30 days. If the information is determined to be incorrect or inaccurate, the credit bureau must either correct it or remove it from your credit report. If the credit reporting agency determines that the information is accurate, they must notify you in writing. If your credit report contains negative information that is accurate, only time will minimize the impact on your credit score. Generally, negative items can remain on your credit for up to seven years but the older the item is, the less damaging it is to your credit.
4. Avoiding Credit Repair Scams
There are a number of credit repair companies that promise consumers they can fix any type of bad credit. In reality, many of these companies make false promises to consumers in order to defraud them. Some companies will claim that they can help you to create a new credit identity using a federal Employee Identification Number (EIN) instead of a Social Security number. Others may claim that you can fix bad credit by “piggybacking” on someone else’s credit report. In exchange for these claims, they charge a fee for their services which many unsuspecting consumers are willing to pay.
In reality, companies operating credit repair scams generally can’t deliver on their promises and they can end up causing even more damage to your credit. The Federal Trade Commission advises consumers to avoid any company that asks you to pay a fee before providing services or makes claims that appear too good to be true.
While bad credit can temporarily hinder you in the short-term, it doesn’t have to determine your financial future. Taking the time to learn more about how credit works can help you to avoid repeating past financial mistakes and rebuild your credit history over time.