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How to Repair Your Bad Credit

Good credit is a must for getting loans at favorable terms and conditions. Can you repair your credit? How can you do that and why?
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
Author: Russell White
Russell White

Writer, Contributor

Experience

As a finance geek and Content editor with 13 years of journalism experience, Russell makes sure every article has the right flow, edits for accuracy, and consumer value. In addition, Russell contributes his own ideas about budgeting, savings, and credit cards.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

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You’re in a never-ending battle: If an individual wants to be trusted by lenders, they need to have good credit.

Good credit will increase a borrower's credit rating, which automatically means that they can take out loans in much more favorable terms and conditions. No one will give money to people with a proven record of late or even missing payments. What's done is done.

Can you repair your credit? How can you do that and why?

What's a Bad Credit?

Every single individual with a loan has a credit history. Credit reporting agencies (the most known are Equifax, Experian, and TransUnion) collect data regarding your payment history and prepare credit reports. Late payments, default on loans or credit cards, a foreclosure will affect negatively a person's credit. This information will later be used to calculate your credit score rating.

But Here’s The Problem:

Bad credit will make lenders wary and cautious. Most probably, if they give you a loan (For example an FHA loan), the interest rate will be higher than if you had a good credit rating. Sometimes even insurance companies look at an individual's credit history to determine how much interest to charge when the client application for any kind of life insurance).

Do You Have Bad Credit?

Certainly, if you have missed out payments or delayed them, this will affect your credit. Also, you can use your credit score rating to grasp an idea of what's happening. Even though credit history is just a part of calculating your credit score, a rating below 620 is considered a bad credit rating.

According to a research, the average credit score for the United States residents was 703 across all age groups in 2019. This was only 3 points below the average credit score for people in age 50 – 59, which scored 706 points. Adults in the 20 – 29 age bracket had the lowest credit score at 662. This is 13.14% less than those in the age group of 60+ who scored 749 points.    

Chart: Credit Scores in the U.S. 2019, by Age

Why Repair Your Credit?

There are several reasons to consider rebuilding your credit history. To start with, the conditions on new loans will never be the same. No lender will be happy about a low credit score. You may believe that bad credit prevents you from obtaining a credit card or a loan, but this is not the case. Bad credit can leave you homeless, without a car, and without a job. This is because an increasing number of businesses are using your credit to make decisions about you.

As a result, this is not a minor issue that does not affect many Americans. Low credit scores are typically associated with higher interest rates, which translates to higher finance charges on your credit card balances. Repairing your credit would allow you to obtain a more competitive interest rate and save money on interest payments.

  • Purchasing or refinancing a home – When purchasing a home, your lender will use your credit score and other financial health indicators to determine the best rate. Excellent credit can get you a home loan with rates around 4%, whereas bad credit can get you rates that exceed 6%.

At first glance, this may not appear to be a significant difference, but every percentage point counts. If you already have a mortgage, good credit can help you qualify for a lower interest rate refinance, which can save you money on your current home loan.

  • Reduced credit card interest rate and card limit – Variable interest rates are common on almost all credit cards. The interest rates on your existing credit cards fluctuate depending on a variety of factors. As the Fed raises the prime rate, your creditors are likely to raise your credit card APR as well. The good news is that you can contact your creditors and ask for lower interest rates.

A good credit score and an error-free credit report are essential for making this happen. Creditors will generally increase your credit limit as you demonstrate your ability to pay your bills on time. A credit card company, on the other hand, will check your credit score before increasing your credit limit. A poor credit history may result in your credit limit being reduced, lowering your credit score even further by increasing your credit utilization.

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  • Get a better car loan – When it comes to car loans, your credit score can mean the difference between driving a newer model or a jalopy to make the monthly payments. Regular lenders will not approve you for an auto loan if you have bad credit. Your only options are to pay cash or to take out auto loans from predatory lenders with exorbitant interest rates that can quickly put you in debt. The disparity in interest rates is mind-boggling.

Rates for excellent credit can be as low as 3.5 percent, but for bad credit, rates can reach 20 percent. Even renting a car can be difficult. If you have poor credit, they may require you to put down a deposit to rent the vehicle, which could derail your vacation plans.

  • Car insurance discounts – Low-interest auto loans aren't the only way that good credit can help you save money. You may also be eligible for lower rates on your auto insurance policy. A credit-based insurance score is used by the majority of auto insurers. In essence, if you have a low credit score, you will pay more for insurance, even if you are a good driver with a clean record.

If your credit score improves, you can contact your agent to see if you qualify for a discount. It may lower your premiums, deductibles, or both, resulting in lower out-of-pocket insurance costs.

In addition, improved credit might help you find more job opportunities, receive a pay rise or a promotion.

Is It Difficult to Repair Credit?

Credit repair is not difficult, and you can rebuild your credit within months if you follow the right procedure. Review your credit report to know the type of information lenders see. If there are incorrect entries and negative information, file a dispute with the credit reporting agency for this information to be removed. Also, ensure you pay bills on time, clear outstanding debts, and keep your old credit card accounts open. These actions can add several points to your credit score over the next several months.

Don’t Forget: Utilities can also be interested in one's credit – if it's bad, they might force you to pay a security deposit. Unfortunately, even potential employers check applicants' credit history to decide whether they are trustworthy or not. As you can see, the scale is beyond your monthly payments or interest rate.

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How Can I Fix My Credit On My Own?

Start by reviewing your credit reports from the three credit bureaus to know if there are errors and incorrect entries. If there is incorrect information on the report, you should dispute the errors with the credit bureau on whose report you found it.

You should also pay your bills on time; you can set automatic payments for monthly bills such as utility bills to avoid late payments.

If you have multiple debts, pay off the high interest debts and debts with low balances first to improve your credit history and lower your credit utilization ratio. Once you have paid down debts, you should keep the accounts open to avoid hurting your credit scores.

Let’s look at it in detail:

1.  Get A Copy Of Your Credit Report

Before you take on any actions, it will be good for you if get copies of your credit reports. There you will find all the “ops” and mistakes you have made which have led to lower credit rating.

Under the FACTA (Fair and Accurate Credit Transactions Act of 2003), all three credit agencies should provide annually a free credit report.

2.  Review And Find Inaccurate Information

Once you have the reports, examine them thoroughly.

It's necessary to check all the information regardless of the report's size. Sometimes it could be really long if you have a continuous credit history. It's not impossible to find mistakes in your reports. Perhaps there is incorrect information, inaccurate late payments or someone else's accounts included.

3.  Dispute Errors And Mistakes

Should you find any errors in your reports, you have the right to dispute them.

To start with, all reports give the owner instructions on how to dispute incorrect information. You can do it either online or by mail or phone. Make sure to include a copy of your report. If the dispute is approved, the credit bureaus will make any necessary changes, therefore your credit will be revised.

4.  Change Your Payment Habits

To have bad credit means you are not the most diligent of payers. Try to make all your payments on time since this is the most important factor when determining your credit score.

In case you have a bad memory, you can subscribe to your lender and they will send you an email to remind you of your upcoming payments. Another option is to use automatic ones. When the time comes, the lender will automatically take the money from your bank account.

5.  Pay Off Overdue Payments

Since credit history is the most important factor when determining your credit score, try to fix all the payments which are overdue.

Pay them as soon as possible and don't wait for them to be “charged-off” or sent to collecting agencies.

6.  Lower The Size Of Your Debt

If you want to improve bad credit history, one way to do it is to reduce the amount of debt you owe. This step is really challenging since most people lack good financial management skills. This is why they have a bad credit history in the first place.

Remember: The ratio between total debt and total credit is the second most important factor contributing to determining your credit score. Another thing to keep in mind is your balance transfers – the higher, the worse for your credit rating. Start with maxed out credit cards since they can seriously damage your credit. Lower the amount under the credit limit. Usually, a 10% to 30% balance of the credit limit is considered good.

It's important for people to have a clear credit history and a good credit rating. It will give them the chance to take out loans on better terms. In the long-run, this comes in handy because it can save a hefty amount of money.

Should I Get Help to Repair My Credit?

If you have been trying to repair your credit, you may consider getting help from a credit repair service. These companies help you repair your credit by disputing incorrect or outdated information on your credit report for a fee, but there is no guarantee that your credit will improve. However, these companies can help you expedite the credit repair process.

You can also fix your credit on your own. There is nothing that credit companies can’t do that you can’t do on your own. Therefore, you should try fixing the errors in your credit report on your own before seeking external help.

According to an annual report issued by the CFPB on 31st December 2020, fraud or scam was the leading reason why many Americans filed for credit repair at 35% compared to the rest of the complaints. The problem with the consumer service followed at 23%. Excessive fees and confusing or misleading disclosure were the least at 7% and 8%, respectively.

Chart: Credit Repair Complaints Filed With CFPB in the U.S. 2020

What Is the Credit Repair Organizations Act?

The Credit Repair Organization Act is a legislation that safeguards the rights of consumers seeking credit repair services. This law protects consumers from deceptive advertising and business practices of companies offering credit repair services. Usually, these companies help improve a customer’s credit score at a fee by disputing false and negative entries in their credit report.

The CROA was introduced to protect consumers from misleading business practices of credit repair companies. Though there is nothing wrong with offering credit repair services, these companies often exaggerate the extent of their services to take advantage of unsuspecting customers.

For example, the company might dupe a customer into paying a significant fee even if the information on the credit report is truthful, and cannot be disputed. These companies cannot compel credit reporting agencies into removing truthful or accurate information from the credit report. Therefore, CROA ensures credit repair companies are truthful and transparent in their advertisement.

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FAQs

There is no quick fix to your credit, and credit repair is a systematic process that takes time. Once you file a dispute, the credit agency has 30 days to respond. The agency can ask for more documentation to verify the dispute.

Therefore, there can be a lot of back and forth before disputes are resolved, and it can take up to six months to solve all disputes. Also, if you have missed payments, late bill payments, and closed credit card accounts, it can take a while for your credit to improve.

If you filed for bankruptcy, you can repair your credit. Once the bankruptcy record is added to your credit report, it can stay for up to 10 years. However, the impact will fade over time. To repair your credit, start by practicing responsible credit habits; make on-time bill payments, keep credit card balances low, build an emergency fund, and reduce credit card use.

You can also seek a credit product for your situation. Viable options include taking a credit-builder loan, secured credit card, or asking a friend with good credit to co-sign a credit card.

It can take anywhere from 6 months to 2 years to rebuild credit from 400, depending on the specific events that damaged your credit score. It can take about 6 months to credit activity to build enough history for a FICO credit score.

If a late mortgage payment dragged your credit score, it could take about 9 months to recover, while a defaulted or missed payment could take up to 18 months to recover.