If you are one of the millions of adults that are dealing with the headaches that generally come with having bad credit, you are not alone. Unfortunately, most people find out about their poor credit score when they are applying for some type of financing. This is the absolute worst time to find out that you aren’t approved due to your bad credit report.
There is some good news. It is possible to repair your bad credit. While you should have received a letter from the lender detailing why you weren’t approved for the loan, it won’t explain how you can resolve the problems. This is where we can help. In this guide you will find the information you need to legally repair your bad credit so you can get the financing you need.
You Don’t Have to Pay Credit Repair Companies
You can turn to a credit repair company for help, and there are several reputable ones. If you simply don’t have the time to devote to rebuilding your score, a credit repair company might be the best choice for you. They will have the time and resources necessary to start repairing your dismal credit score, but these companies also charge a fee for their services.
It will take a little time, effort and careful financial planning but over time you will see your credit score start to rise, and here are the few steps to follow to get started.
Check Your Credit Report and Score
The very first step is to check your credit reports and scores. There are three main credit reporting bureaus, Equifax, Experian and TransUnion.
It is important to get a copy of all 3 reports since the data can vary, and it all affects your credit score. This means that there might be an error on one report, but not on the others. One error on any report could cause your credit score to drop several points.
What to Expect on a Credit Report
Once you have a copy of your reports you’ll find that they contain a lot of information. This will include basic personal details, and you’ll want to ensure that everything is accurate. You might also find previous addresses listed, and this is fine as long as the current one is correct.
Financial issues will also be on your credit report. All payments made on time, along with loans that were repaid will be included in your credit history. While these help to raise your score, the credit report will also contain a record of any liens, missed payments, foreclosures and bankruptcies. These are the items that cause your score to fall below the subprime rate.
Your financial information is divided into five categories, and this is what the credit reporting bureaus use to calculate your score.
- Payment history (35 percent)
- Credit utilization (30 percent)
- Length of credit history (15 percent)
- Types of credit accounts (10 percent)
- Number of credit checks (10 percent)
How to Repair Your Bad Credit
Now that you know how poor your credit score is, it is time to start fixing the problems.
Trying to erase accurate information is illegal, and is a punishable offense.
This doesn’t mean that there aren’t some steps you can take to legally improve your bad credit score for free.
Pinpoint the Problems
Once you have a copy of your credit reports, you can start pinpointing the problem areas. You don’t even have to completely understand the complicated terminology used by the financial industry, if you know what is responsible for your poor credit score.
Your payment history accounts for 35 percent of your score, and is responsible for most of the significant drops. Even one missed payment will have a noticeable effect on your credit.
Thirty percent of your score is determined by your amount of revolving credit, which is compared to the limits on the accounts.
These two categories combined account for 65 percent of your credit score, and are where most problems occur.
The remainder of your credit score is comprised by how long the accounts have been open, along with the type. There are two types of credit accounts, revolving and installment. Revolving refers to charge cards and open lines of credit, while examples of installment accounts include student, auto and home loans. When you are applying for any type of financing, creditors will want to see that you are capable of responsibly managing both types of credit.
Your credit report will also list your history of applying for financing, and it makes up 10 percent of your score. If you have been actively applying for credit recently this can cause a temporary dip in your score, but most lenders also take this into account when they are checking your history. Potential lenders know that this usually only indicates that the applicant is simply looking for the best interest rate. These minor dings to your score generally disappear from your credit report in 12 months or less, making it a minor problem that you don’t need to fix.
Clean up your Credit Report
As you are going over your three credit reports, you might find errors. Even if it is only a minor mistake it is important to start disputing it as soon as possible. Once the dispute is filed with the three credit reporting agencies, they have thirty days to respond. There are a few exceptions which can extend the response deadline to 45 days, but in most cases it will take less than a month for the bureaus to dispute or agree with your claim.
Here are a few tips on disputing an error on your credit report.
- A separate letter must be filed with each of the three credit reporting agencies, Experian, Equifax and TransUnion.
- If there are multiple errors, a separate letter must be filed for each mistake found.
- Disputes regarding errors on credit reports can be filed online or sent in via traditional mail.
Work on Building Positive Credit History
There are a few steps you can take to start building a positive credit history, instead of waiting for the negative items to disappear on their own.
Even if you were turned down for an auto loan or other type of financing, you might still be able to secure a credit card. The interest rates will probably be higher, but if you pay the balance off each month you can rebuild your credit without spending a lot on accumulated fees.
Here are a few other steps you can take to build positive credit history.
- Pay down balances on credit cards, especially ones with a high interest rate. Try to only use them when it is necessary, at least until your see your credit rating improve.
- You might want to consider applying for a “credit builder loan” from a traditional bank or other lending institution. This is always a good option for anyone worried that they might abuse a credit card.
- Don’t close credit card accounts once the balance has been paid off. This will make it harder for it to have a positive effect on your credit score.
- When you are shopping for an auto loan or mortgage financial experts recommend doing so within a 30 to 45 day time frame. This will give you plenty of time to find the best interest rate, without it having a detrimental effect on how potential lenders view your credit.
- If you have any outstanding accounts with collection agencies, you might want to think about finally paying them off. While some newer formulas used to calculate credit scores do not factor in accounts in collections, there are still a few that do.
How Long Does It Take to Repair Bad Credit?
If the negative information on your credit report is accurate it will take time for it to come off. How long will vary depending on the type.
- Past due payments: 7 years from the due date of the late payment.
- Foreclosures: 7 years
- Collection accounts: 7 years and 6 months from the date the debt enter into delinquency.
- Short sales: 7 years
- Bankruptcies: 10 years from the filing date or 7 years for Chapter 13.
- Repossessions: 7 years
- Judgements: 7 years if the payment was made in full, otherwise it could be significantly longer.
- Tax liens: 7 years from the date they were paid.
- Charge-offs: 7 years from the date the account was “charged off”.
With a lot of patience and self-control it is possible to repair your bad credit, and best of all you now know how to rebuild it for free.