Rebuilding credit can feel overwhelming. It takes time and effort, but it is possible. Read on for 6 steps you can start taking now.
Excessive debt. Higher interest rates. Loan denials. Required security deposits. Increased insurance premiums.
If you’re feeling the financial effects of less-than-stellar credit, you might be thinking about paying a hefty fee to a credit repair company to fix your credit. Be careful. Companies that promise to wipe away negative, but accurate, credit data or create a new credit profile violate the Credit Repair Organizations Act. In fact, credit repair companies are required to let you know there are steps you can take to repair your own credit.
While there’s no magic trick to fix past credit missteps, there are actions you can take to repair your credit.
Start by focusing on these six credit behaviors.
1. Review your credit report
The best place to start repairing your credit is by going to the source. If you have a credit rating, then you have a credit history report. It may be at one or more of the three major credit reporting bureaus: Equifax, Experian, and TransUnion. Creditors typically report account activity to at least one bureau.
Your credit report is important because the information in it is used to determine your credit score. Two main credit scoring agencies, FICO® and VantageScore®, are used to convert the data from your report into a credit score.
Your credit score is influenced by several factors, like your payment history, amount of debt, length of credit history, credit mix and amount of new credit. Of those factors, the two most important are payment history and your amount owed/amount of available credit.
You can order report copies from each of the credit reporting bureaus or visit AnnualCreditReport.com to access all three at no charge once every 12 months.
You’ll want to review your credit history report at least twice a year to ensure data is accurate. It’s possible to review your credit report three times a year at no cost by staggering your annual requests. Simply request from a different bureau every four months in rotation.
Correcting errors can be an easy win. Carefully review each report and note inaccuracies, such as duplicate accounts or incorrect personal information. You can dispute errors on credit history reports by following each bureau’s dispute policies.
Your credit report will also list any factors that have a negative impact on your score. This list can help you spot errors and also gives you steps to take toward raising your score.
2. Pay your bills on time, every time
Payment history is the most important factor when calculating a FICO® Score. Missed or late payments stay on your report just as long as on-time payments, up to seven years. If you’re behind on payments, the first step is to catch up and stay current. Going forward, make all payments before the due date. Work with your creditor or financial institution to set up reminders or enroll in automatic bill pay.
3. Reduce account balances
The amount of debt you owe is the second most important factor influencing a FICO® Score. You’ll want to look at the total amount of debt you have and the percentage of available credit you’re using. Accounts that have balances close to their credit limit can lower your score. For example, on a credit card with a $1,000 limit, it’s better for your balance to be $500 than $900. You can reduce your debt faster by paying more than the minimum required payment whenever you can.
4. Keep accounts open
When you pay off credit accounts, keep them open, even if you won’t use them again. Credit history length shows your experience with credit and can positively affect your credit score. If you pay off a high-interest credit card, don’t close the account, hoping negative information will vanish. Credit history on a closed account will still appear and factor into your FICO® Score.
5. Maintain a variety of credit accounts
A mix of credit types can help boost your credit score. For example, when you pay your credit card bill, mortgage loan, and auto loan as agreed, it shows you can juggle a variety of credit obligations. While credit mix counts for a smaller portion of your FICO® Score, it still matters and can make a difference.
6. Go slow with new credit accounts
It’s tempting to try and rebuild your credit by opening new credit accounts and starting over. Unfortunately, it doesn’t work that way. The first step should be to take care of your current credit obligations. Applying for new credit can hurt your FICO® Score, even though it has less influence than other credit data. Opening several new accounts at once can cause your score to dip.
Be patient. Rebuilding credit takes time. It can be a slow process, so be sure to celebrate your small successes along the way. Pat yourself on the back for a month with no late payments. Celebrate every time you pay off an account. Do whatever helps you stay motivated to improve your credit. With consistent effort and good credit behavior, you can change your financial life for the better.