Step one: Know where you stand with your credit
Before you can even begin to start on your credit repair quest, you need to know how bad your credit score is in the first place. For this reason, you should always start the process by reading through your credit report so you know exactly where you stand – and to do that, you’ll need to request a copy of your report. Luckily this should be straightforward to achieve. You’re legally entitled to a free annual credit report from each of the three main credit bureaus (Equifax, Experian and TransUnion), which can be sourced from AnnualCreditReport.com (opens in new tab). There are other scenarios where you may be eligible for a free credit report in addition to the annual reports made available by federal law, such as if you’ve been declined credit, you’re on welfare, you’re unemployed or are the victim of identity theft (opens in new tab). It’s also possible to purchase reports directly from the bureaus. However you choose to access your report, once received you need to carefully go through every item in your credit history to spot any red flags that may provide an indication of why your score is less than perfect. These may be things like overdue accounts, those that have been sent to collections (opens in new tab), credit cards (opens in new tab) that are maxed out, or even information that’s entirely false, such as accounts that aren’t yours or late payments that have been incorrectly reported.
Step two: Dispute any errors
Any derogatory marks listed on your credit report can remain there for seven years (opens in new tab), during which time they’ll drag down your score and make you less appealing to future lenders. It’s for this reason that if any of those marks are on your report in error, you need to get them expunged as quickly as possible. You’ll need to dispute any errors (opens in new tab) you spot with the relevant credit bureau. To do this you should write to the bureau and list any details you think are inaccurate, and will need to include copies of any supporting documents to back up your claim. If you have sufficient information for them to investigate, they have 30 days in which to do so (during which time they’ll contact the creditor who provided the original information) and issue a response. If it comes back in your favor, the offending entry will be removed or updated as necessary. You can file a dispute online, or over the phone should you prefer, and you also have the option of contacting your creditors directly to dispute any inaccuracies, who are legally obliged to investigate and remove any incorrect information from your credit report. Or, you may like to seek the services of credit repair companies to take over this aspect of credit management instead.
Step three: Tackle your debt
Once you’ve checked for any errors and know where you stand financially, you can begin to tackle your debt. Bringing down your balances is key when it comes to credit scores, as lenders want to know that you’re not already over-extending yourself. This means that if you’ve got a few maxed-out credit cards you may want to consider debt consolidation (opens in new tab) as a way to streamline things, or simply have a plan of which debt to pay off first (opens in new tab) and start paying things down. It’s all about your credit utilization ratio – how much you currently owe compared with how much credit you have available to you – and the lower the score, the better for your credit profile. Ideally, you’ll want to keep your credit utilization ratio lower than 30%, and below 10% would be even better.
Step four: Strike the right balance
While the goal is to ensure that all of your accounts are reported as being ‘current’, hold fire from completely closing any accounts that you’ve been able to pay off. As above, the amount of credit you have available to you can have a direct impact on your credit score, which means that if you close a credit card with a high limit, you’ve effectively lowered the amount of credit you currently have available – and if you’ve still got high balances on other cards, your credit utilization ratio will have increased accordingly. Keeping accounts open can benefit your score in another way, too, as aged accounts in good standing have a positive impact on your credit history. Just make sure that an available balance isn’t too much of a temptation to spend.
Step five: Commit to better money management
Finally, you’ll want to come up with a plan of how you’re going to move forward, and at the heart of that will be committing to better money management. This means you need to make sure that you never miss a payment on any of your credit commitments – given that payment history can account for 35% of your credit score, this is something you really need to be strict with – and try to avoid applying for any new finance agreements until your score has improved. Even refinancing can result in a temporary blip (opens in new tab) to your score, so if it’s already lacking, it could be best to wait a bit longer. Yet it ideally shouldn’t take too long before you see results. By focusing on your current commitments, making timely payments and keeping balances in check you’ll be able to slowly build your credit score, and pretty soon you’ll be eligible for the very best personal loans (opens in new tab), refinance mortgages and any other form of credit you could require.
