Your credit score is one of the most important aspects of your financial health, but it’s also one of the most fragile. Building a great credit score can take years, but damaging it can seem to happen—in some situations—overnight.
Thankfully, with the right credit repair tactics, you can reclaim this pillar of your financial strength. Knowing how to repair credit can get you back on track and put the days of less-than-great credit behind you.
What can damage your credit?
Your credit score is a reflection of your likelihood of defaulting or missing payments on a loan in the future. Anything that makes you riskier in the eyes of lenders or demonstrates that you might not be an ideal borrower can damage your credit. Some of the more common causes include missed payments, late payments, too many hard credit inquiries, too much outstanding debt or too short of a credit history.
5 steps to repair your credit
- Check your credit score and pull your report from each credit bureau
- Review your report and dispute any errors
- Make a payment plan
- Establish a positive credit history
- Seek out credit counseling to discuss your options
1. Check your credit score and pull your report from each credit bureau
The first step in the credit repair process is understanding where you’re at, where you need to be and what goes into your credit score. Start by pulling a copy of your credit report; there are plenty of free options where you can get a copy of your report.
One of the most popular free options is AnnualCreditReport.com. Generally, the site allows one free report annually, but in response to the effects of COVID-19, you can get a free report every single week between now and April of 2021. The site does allow you to pull from all three reporting bureaus, which is advised.
2. Review your report and dispute any errors
The next step in how to repair your credit is reviewing your reports for any errors or discrepancies. According to a Federal Trade Commission (FTC) study, one in four consumers found an error on their credit reports. If you have an error in your report, your credit score may be unfairly low.
If you find a discrepancy, file a dispute with the reporting bureau immediately. In the same FTC study, four out of five people who reported a discrepancy receive some sort of modification to their credit report.
What happens after a dispute?
According to credit reporting bureau Experian, most disputes are completed within 10 to 14 business days after they’re reported, but often much more quickly. The Fair Credit Reporting Act (FCRA) requires disputes to be addressed in no longer than 30 days.
Once the discrepancy is corrected, you may see changes to your score almost immediately. Even though the bureaus are required to handle discrepancies in under 30 days, you should still make it a habit to follow up and double-check your report to make sure things are corrected appropriately.
3. Make a payment plan
Often, it can be confusing to know where to start when your credit is in need of repair. The best course of action is to lay out a payment plan to tackle debt that takes into account your current income, debt obligations and past-due balances.
It’s always smart to start by catching up on your past-due balances. As late payments get later, the effect on your credit score increases. Once you’ve accounted for these instances, make a plan that covers at least the minimum balances on all of your debt. If you need to contact your debt holders to work out special arrangements to keep up, do it. There’s no penalty on your credit report for making arrangements with your creditor.
If you have extra money that you can put toward your debt, you have two options: The most fiscally responsible plan is to start with the debt that is the most expensive, but many people like to start with smaller accounts to get them closed and then focus on the larger accounts.
4. Establish a positive credit history
The good news is that no matter which method you choose, your on-time payments will demonstrate good borrowing behavior and an attempt to pay down your debt. These two factors combined will help your credit score to recover. On top of that, time is on your side; as time passes, the age of your credit accounts will get longer, in turn helping your score.
At this point, you have some additional options you can employ to help build your credit score. First, you can take advantage of balance transfer credit cards to lower your interest rate for the length of the promotional period. While opening the new account may temporarily lower your credit score, the interest savings that can be applied to the principal balance will have a long-term, net-positive effect on your credit. Remember, contrary to what some credit repair services may claim, good credit does take time.
A second option that may help with credit repair is opening a new line of credit — even if there is no balance transfer incentive. While the new account will have the same temporary score lowering effect, it will raise your overall available credit. What this does is lower the percentage of your credit utilization. Basically, the more credit you have access to that you’re not using, the better it looks to creditors. With a FICO credit score, credit utilization is part of the amounts owed category, which makes up 30 percent of your overall score.
5. Seek out credit counseling to discuss your options
If you’re still confused or having trouble with your debt payoff, there is nothing wrong with asking for a little help from a professional. Credit counseling services exist to help people just like you determine the best course of action to get their financial health back on track.
Sometimes it can be as simple as driving home the points already covered in this credit repair guide; in other instances, it might be something more extreme, like filing for bankruptcy. It all depends on where you’re at, what your goals are and what you need to do in order to get there.
When searching for help, look for credit counselors. You’ll want to stay away from debt settlement companies that will advise you to stop paying completely on your accounts, which can make the situation worse. Be careful, though, because some debt settlement companies operate under the guise of credit counselors.
The best way to know you’re working with a reputable credit counselor is to ask what their plan for you entails. If it involves not paying on debt and paying their company instead, you’ll want to find another service provider. But if the counselors advise plans similar to what has been mentioned here, chances are the company has your best interests at heart.