How to Fix Your Credit
October 30, 2019
Achieving a better credit score can mean qualifying for a mortgage, lower interest rate and overall better terms on a loan or credit card. If you’re wondering how to fix your credit and make yourself more appealing to lenders, there are several ways to improve and repair your credit over time. The best time to learn how to fix a credit score is now, so when you need approval for a loan or credit card, your score is already where it should be.
Rather than only looking for ways to raise your score, you may actually be in need of fixing something that’s broken. The credit system is far from perfect and because of it, millions of Americans have credit scores that make them seem riskier than they are. Fixing your credit may be exactly what you need to do.
Our guide takes you through all of the steps and options for fixing your credit. We explain ways to improve your credit score and how to remove negative incidents and errors from your credit report. What you may not realize is that errors — entries that should have never been there to begin with — are lowering your credit score considerably. Below are eight steps you can take to fix your bad credit.
1. Get Your Credit Report
When aiming to fix credit, a large portion involves repairing errors and omissions on your report. That’s why it’s important to view your credit report often — making sure it’s accurate and that there are no fraudulent activities.
How to get a free credit report
You’ll need to start by getting a credit report to determine what exactly needs fixing. Each of the three major credit bureaus are required by law to give you one free credit report per year. If you space them out, you can get a free credit report every four months.
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
On your report, you’ll see your credit history, including any credit cards, loans, accounts that were sent to collection agencies and legal actions like foreclosures or bankruptcies.
Because you get three free reports every year, it’s unlikely you’ll need additional copies, but you can purchase them directly from the credit bureaus. Each report costs anywhere from $1 to $11.
2. Check Your Credit Report for Errors
Each time you open your credit report, you should review it closely for errors. In many cases, these errors can be significant. As many as 25% of all credit reports contain errors serious enough to cause denial on a credit application. Responsibly managing your credit will help you achieve a better credit score, but truly fixing bad credit requires that you to focus on the source of the problem.
When reviewing your credit report for errors, be sure to look for:
- Incorrect personal information (i.e. misspellings, wrong addresses)
- Accounts that don’t belong to you
- Missing accounts that should be listed on your report
- Incorrect public records (i.e. bankruptcies, foreclosures)
- Accounts that aren’t accurate (i.e. they say they’re open when they’re actually closed)
- Accounts listed as “closed by grantor” (meaning the lender closed the account on you)
- Duplicate accounts
- Data management errors
- Delinquencies or derogatory marks
- Fraudulent activity
- Incorrect inquiries
Any of these errors could impact your credit — and whether or not a lender will approve you for a loan. If you do find an error on your report, you should check to see if the error appears on the two other reports produced by the major credit bureaus.
By fixing simple errors, many people have seen dramatic improvement of their credit standing in a relatively short period of time. Taking an active approach in managing your credit and fixing errors will produce much better results than sitting back and waiting for your credit score to improve.
3. Dispute Errors in Your Report
Once you’ve found mistakes on your credit report, it’s time to dispute the errors. Luckily, the bureaus are obligated legally to try and resolve mistakes. You can request a correction online or by mail or phone.
Report your errors directly to the credit bureau where you received your report. You’ll need to provide documentation, such as proof of your identity, the erroneous account information and any documentation that proves the error is false, such as court documents or credit card closing statements.
File your free dispute with:
- Online process
- By phone: 800-916-8800
- By mail:
P.O. Box 4500
Allen, TX 75013
- Online process
- By phone: 866-349-5191
- By mail:
Equifax Information Services LLC
P.O. Box 740256
Atlanta, GA 30374-0256
- Online process
- By phone: 800-916-8800
- By mail:
TransUnion Consumer Solutions
P.O. Box 2000
Chester, PA 19016-2000
You should also contact the lender or creditor that issued the account to let them know of your dispute and the inaccuracy. Often times the lender can correct the information on their end, which should update on all of the three main credit reports. In most cases, you should hear a response to your dispute within 30-45 days.
4. Pay Late or Past Due Accounts
In addition to reporting the errors on your credit report, you should focus on paying overdue balances on your accounts. Until a payment is 30 days past due, it isn’t considered late by the credit bureaus.
However, once a payment is beyond 30 days past due, creditors and lenders can report your account to the credit bureaus — which ultimately impacts your score and creditworthiness. The longer your payment is overdue, the worse it is for your credit. Late payments can stay on your credit report for as long as seven years, so it’s important to pay them off sooner rather than later.
When do collection agencies get involved?
If an account has a past due balance of more than 30 days, your creditor may turn your account over to a collections department or agency to seek the funds directly from you. When an account is sold to a collections agency, the account can be noted on your credit report — often having an enormous negative impact on your credit score.
Collections agencies work to collect funds on amounts due for credit cards, personal loans, auto loans and mortgages. Collection entries will fall off of your report after seven years. If the collection information is incorrect — just like any other error — you can file a dispute.
What is a charge-off?
When payments are 180 days (or six months) past due, your credit card will become “charged off” — meaning you no longer have the option make regular minimum payments. Your creditor considers the debt as a loss in their own records, cancels your account, and you’ll only be able to pay the balance in full. You may be charged a late fee for each additional month that passes.
Being charged off greatly damages your creditworthiness. Your lender can even increase your interest rate to the penalty rate, which is often the highest rate possible. In addition, your creditor may assign the account to a collections agency. If you can’t afford to pay the amount in full, talk with your lender about payment options. If an account goes to charge-off status, this derogatory mark will remain on your report for seven years.
What is a pay-for-delete?
A pay-for-delete is an agreement between a consumer and a collection agency to remove a collection account from your credit report — with an arrangement to pay the full amount or a lesser agreed upon amount. You can send a pay-for-delete letter to your creditor asking them to remove the charged off account from your credit report in exchange for paying the past due balance.
5. Increase Your Credit Limits
Credit card companies give each borrower a credit limit — denoting the maximum amount that can be spent before paying off at least some of the balance. Depending on the credit card and your creditworthiness, your credit limit might be a few hundred or a few thousand dollars. If you ask your creditor to increase your credit limit — and they grant it — it could improve your credit score, and give you a buffer before you need to pay on your balance.
You’ll also want to consider your credit utilization ratio — meaning how much you owe on all of your accounts compared with your total available credit.
For example, if you owe $5,000 on all of your credit cards, and you have $20,000 of combined available credit, your credit utilization ratio is 25%. Experts often recommend aiming for a credit utilization threshold of 10%, although having a ratio of up to 30% usually doesn’t impact your credit score. Once your ratio is above 30%, it begins to negatively impact your credit standing. By increasing your credit limits, your credit utilization ratio decreases.
6. Pay off High-interest, New Credit Accounts First
When you have multiple balances to pay off, there are two main approaches to take.
You can either pay off the account that suffers from the highest interest rate, such as a card with a 14.5% APR before paying on a balance with only a 7% APR.
Or, you can pay off your account with the lowest balance first, so the balance no longer incurs interest. For instance, if you have a new credit card with a balance of only $400, it may be advantageous to pay that amount in full, rather than having continual interest build on that account. By paying off an account in a lump sum, you’ll also have one less account to think about and worry about. Of course, you’ll still want to make at least the minimum payments on your other accounts.
7. Open a New Credit Card
You may wish to open a new card to improve your credit. A new credit card increases your total available credit — which impacts (and generally lowers) your credit utilization ratio. The smaller your ratio, the better your credit score.
When considering whether to open another card, remember that you want to pay off the balance, not incur more debt. You’ll also want to check if the new card has an annual fee and if the fee is worth it to you. Opening several new accounts at once could negatively impact your score, as it makes you appear riskier to potential lenders.
Remember, too, that the length of your credit history matters. In general, accounts that have been open longer — with a good payment history — are better for your credit score. Keep that in mind when deciding which accounts remain open and which ones to close. By keeping your older accounts open, you’re building your credit age. The average amount of time all of your accounts have been open is considered your overall credit age. The older your credit age, typically the better your score.
8. Pay Balances on Time
Paying off your debt is an important element needed to fix credit. By making payments on time, you’re showing your current creditors — and potential lenders — that you are a responsible borrower. Whether it’s your credit card payment or utility bill, be sure to pay on time. Set up automatic monthly payments to make this a consistent habit.
What is Bad Credit?
Bad credit is regarded as any score below 560 on the FICO® scoring system. Your credit score is determined based on a number of factors, including your payment history, credit utilization ratio and length of credit. Bad credit might mean you’ve failed to keep up with payments on-time, maxed out your credit cards or have a negative incident like a foreclosure.
While using roughly the same criteria, each credit agency calculates your score a bit differently. Therefore, your credit score might differ slightly based on the agency you use. In many cases, there are negative entries listed on your credit report that don’t actually belong there.
By law, you have the right to dispute these erroneous items. Any negative listing you feel may be inaccurate, untimely, misleading, incomplete, ambiguous, unverifiable, biased or unclear ("questionable") can be disputed with the credit bureaus.
Tips for Maintaining Healthy Credit
Once you’ve had a chance to fix your credit, there are several actions you can take to maintain your healthy credit. By keeping your credit status strong, you’ll have more opportunities for low interest rates, and loan and credit card approvals.
Limit the number of hard inquiries: Soft inquiries don’t impact your credit, like when you check on your own credit score. Hard inquiries can affect your score — and occur when you apply for a loan or new credit card. Too many hard inquiries in a short period of time, such as a couple of months, can make you seem riskier and, therefore, can negatively impact your score.
Set up auto-payments: Whether you’re paying the full balance or making a minimum payment, make sure your payments are on time. Log in online to your credit card, loan and utility accounts to set up automatic payments. This ensures you pay on time and gives you one less thing to worry about.
Keep old accounts open: Even if you don’t use a certain credit card very often but have had the account open for a while, don’t close it. Older accounts show that you’ve maintained a healthy payment history with creditors — making you appear more creditworthy.
Aim for a mix: Maintaining a mix of different types of credit can give your score a boost, such as paying on a car loan, credit card and mortgage all at once. Just be sure you can make timely payments before opening new accounts or borrowing additional money.
Monitor your credit report: Review your credit report at least twice a year to ensure there are no additional errors. Finding errors and disputing them can have a tremendous impact on your credit score and your overall ability to get approved by lenders.
Avoid multiple new accounts at once: While sometimes unavoidable — like if you need to buy a car at the same time as applying for a credit card — it’s best to limit opening several accounts within a short period. Some creditors view multiple new accounts as risky. The new accounts can also lower your credit age.
Ask for professional help: If you want to dramatically improve your credit standing — ultimately leading to approval for bigger loans with better terms — consider asking a professional. You can considerably improve your financial standing with the right help.