Credit Repair Guide – Your 101 to Repairing Your Credit
Joy Wallet is advertiser-supported: we may earn compensation from the products and offers mentioned in this article. However, any expressed opinions are our own and aren't influenced by compensation. To read our full disclosure, click here.
If you have bad credit, you will struggle to rent an apartment, get a credit card, or get approved for a personal loan. But there are ways you can improve your credit score. Some credit repair companies help improve your credit, or you could try it yourself. Regardless of your choice, remaining diligent about your finances and paying off the debt in time is important.
There is no way to repair your credit instantly; if there is incorrect information on the credit report, it will remain on it anywhere between 7 to 10 years. If you have fallen behind on the debts or bills, a debt collector will contact you, but before that, you need to educate yourself about your alternatives, the impact on your credit, and the best ways of improving your credit score. You can take certain steps to start working towards a strong credit history and improve your credit score over time. Our credit repair guide explains how you can repair your credit and get approved for credit and loans in the future.
Related: Money Decisions That Can Hurt Your Credit Score
In this article
DIY credit repair
Here are a few steps you can take for DIY credit repair.
Go through the credit report thoroughly
If you want to understand where you stand regarding your credit score, you need to get a copy of your credit report. You must identify the factors that affect the scores to understand what your score reflects. In case of any inaccurate information on the credit report, contact the credit reporting agency on whose report you saw the error. That said, you must also write to the lender reporting to the credit bureau and request them to correct the incorrect or negative items from the report. If you have become a victim of identity theft, your credit score will be impacted. You can also consider credit monitoring services that notify you about any unusual changes or transactions in your account.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Improve the payment history
Your FICO score considers the payment history, and missed or late payments will immediately reduce your credit scores. Even collections or bankruptcies can cause damage to the score. Since the information remains on the credit report for many years to come, it will continue to impact the score. The collection agency will consider your debt size and missed payment timing. If the debt is big and you have recently missed payments, it will impact the score. Try to pay on time, which will strongly impact your credit scores. Prepare a budget and set aside a certain amount each month for debt repayment; it will help improve the score over time.
Understand the credit utilization ratio
A very important aspect of your credit score is the credit utilization ratio. Credit scoring models always consider this ratio which shows the amount you owe compared to the amount of credit you currently have. It is the total of all the revolving debts divided by the total credit available and multiplied by 100. This ratio shows how well you manage the credit limit. A high ratio can hurt the credit score, so keeping the credit utilization ratio below 30% is suggested. The lower, the better it is. You can look at different ways to reduce this ratio.
Firstly, pay down the account balances and then increase the available credit by requesting a credit limit increase, or you could open a new credit card account. Alternatively, you could consolidate the credit card debt with a personal loan not included in the credit utilization ratio calculation. If you want to increase the credit limit, you need to ensure that you do not fall into deeper debt. If you apply for a new credit card, there will be a hard inquiry on the credit report, which could impact the credit score. Applying for a personal loan may also become difficult with poor credit. However, paying down the balances is the best way to improve your credit utilization rate and score.
Consider your credit accounts
All scoring models will consider the amount you owe across all the different accounts. Hence, if there is debt across various accounts, paying off at least some of them is ideal. Even if you pay down your credit card debt to zero, keep the account open because closing it will hurt scores. It will eliminate the remaining credit and immediately increase the credit utilization ratio. This is why keeping the paid-off accounts open is a huge plus. They will be in good standing since they are aged accounts and paid off.
Go through the credit history
Scoring models, including FICO, consider the age of the oldest account and the average age of the accounts, and you will be rewarded if you have a longer credit history. Hence, you must consider your credit history before closing your credit card account. Leave a card open, although you no longer want to use it. This could trigger additional debt and spending, but you need to be careful here. Do not overspend under any circumstances. Remember to evaluate your financial situation and then pick a strategy that is ideal for you.
Do not take new credit
Opening various credit accounts quickly will make you look risky and could hurt your credit score. So, before you apply for a new credit card account or take a new loan, you must consider its impact on your credit score. When looking for a mortgage or a new car, look for the best rates, and these inquiries could be grouped to be counted as one for credit scoring. In most models, a recent inquiry will have a higher impact than previous ones.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
Debt consolidation
Debt consolidation can help improve your credit score, but it can also hurt the score if you do not stay diligent with the repayment plan. Debt consolidation is taking out a loan to repay several other loans. Positive payment history will improve your credit score as you make the payments over time. Transferring a high-interest loan to a lower interest rate will make it easier to pay the debt and improve your credit score.
You can consolidate debt in different ways- balance transfer credit cards, retirement account loans, installment loans, personal loans, or home equity loans. Your credit history and the debt-to-income ratio will play a crucial role in the terms; if you have bad credit, it will work as a disadvantage. But some lenders cater to borrowers with poor credit. Before applying for a debt consolidation loan, pull the credit report using a website like annualcreditreport.com and look for any errors. Report them if there is an issue in the report.
Credit repair companies
A credit repair company is an organization that helps improve your credit for a fee. They promise to do all the heavy lifting of working with the major credit reporting agencies. All companies start by requesting a copy of the free credit report from the three credit bureaus. They will look for derogatory remarks or negative information and will set a plan for disputing them or negotiating with the creditors to get these items removed. The company can also recommend applying for new accounts to add positive information to the reports. But you should take on more credit only if you need it. You need to pay a fee for the credit repair services and to ensure that you do not fall victim to a scam, double-check that the organization is registered with the Consumer Financial Protection Bureau.
Credit counseling
If you are struggling with your credit score, a credit counseling service can help you. It is a service where consumers receive financial guidance, and nonprofit organizations give it free. They begin with a credit report review and will happily answer any questions you may have. You can also get their debt help, which involves reviewing the budget and recommending the ideal debt repayment options. This could include a debt consolidation loan, debt management plan, or debt settlement.
Credit builder loans
If you do not have much credit history, it could become difficult for you to apply for credit cards and be denied credit. You cannot open a credit account till you have a credit history, and you will not have a history if you do not have a card to use. With a stable job, you could be approved for a credit card, but if you don’t, it could become difficult. This is where a credit builder loan helps you.
You do not need a credit history to be approved for one, and the loan is ideal for newbies to build a credit history so they can be approved later. You get to borrow money in a credit builder loan, which will be deposited into a CD or a savings account. It is the opposite of a transitional loan. You receive the money after you have repaid the loan. It should be at least six months in tenure, and you must make regular, on-time payments in these six months for the loan to affect your credit score. A credit builder loan will help build history and improve the credit score. The loan usually has an APR ranging from 6% to 16%.
Related: Credit Saint Review – Improve Your Credit Score
Dispute letter
Section 609 of the Fair Credit Reporting Act addresses your rights to ask for copies of your credit reports and the information that appears on them. In section 611 of the statute, you enjoy the right to dispute the information you believe to be wrong or unverifiable. If this information cannot be confirmed, it should be removed. Consumers often send dispute letters to the top credit reporting agencies, including Equifax, TransUnion, and Experian, since they believe something on the credit report is wrong.
The impact of a dispute letter is that it causes the credit reporting agency to correct the alleged error. With the 609 Dispute letter, if you ask the major credit bureaus for information they cannot produce, like the cashed checks or signed copies of the credit application, they must remove this item since it is unverifiable. However, if the information on the credit report is verifiable and accurate, then the chances are that it will remain on the credit report.
Relieve $25k+ in Credit Card Debt or Personal Loan Debt With TurboDebt
- Relieve $25k+ in credit card debt or personal loan debt with this special relief program.
- TurboDebt has a Trustpilot rating of 5/5 based on 1288 reviews
- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
FAQs
Can a student loan affect my credit score?
When you apply for student loans, the lender will perform a credit check to see if you qualify for a loan. Federal student loans do not have a hard inquiry and this will not lower your credit score. But if you fail to make the repayment on time, it will impact the score and could bring trouble. It is best to check the credit report before you apply for the loan.
What is the fastest way to repair credit?
There are some DIY strategies you can use to improve your credit quickly. Pay the credit card balances and clear past dues on time. Ask for a higher credit limit and dispute the credit report errors. You can also apply for a secured credit card and deal with the collection accounts. While this might not be possible overnight, it is certainly possible to improve your credit score if you follow these strategies carefully and maintain discipline regarding your finances.
Can I remove the closed account from my credit report?
It is possible to remove the closed account from your report by simply sending a written request to remove the account from the credit report to the creditor that reported the information to the bureau.
What are charge-offs, and how long do they remain on the credit report?
A charge-off means your creditor has written off the account as a loss and has closed it to future charges. This information is considered negative and will remain on the credit report for 7 years.
The bottom line
Building good credit does not happen overnight. It takes commitment and financial discipline. You must stay focused and aim to get a hold of your finances. The credit repair process will take time, but it will show results if you are diligent about how and where you spend money. Prepare a budget and stick to it. Avoid opening a new credit line if you are not confident of being able to repay the loan, and remember to go through your credit report at regular intervals.
Joy Wallet is an independent publisher and comparison service, not an investment advisor, financial advisor, loan broker, insurance producer, or insurance broker. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. Joy Wallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. We encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Featured estimates are based on past market performance, and past performance is not a guarantee of future performance.
Our site doesn’t feature every company or financial product available on the market. We are compensated by our partners, which may influence which products we review and write about (and where those products appear on our site), but it in no way affects our recommendations or advice. Our editorials are grounded on independent research. Our partners cannot pay us to guarantee favorable reviews of their products or services.
We value your privacy. We work with trusted partners to provide relevant advertising based on information about your use of Joy Wallet’s and third-party websites and applications. This includes, but is not limited to, sharing information about your web browsing activities with Meta (Facebook) and Google. All of the web browsing information that is shared is anonymized. To learn more, click on our Privacy Policy link.
Images appearing across JoyWallet are courtesy of shutterstock.com.
Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
Share this article
