How to Repair Credit

What we’ll cover:

• Why credit scores matter
• What’s considered “bad credit” based on your score and how you get a bad credit score
• How long negative events like bankruptcy, foreclosure and late payments stay on your credit report
• Five ways you can repair credit and the rundown on credit repair services
• How credit cards – opening them, closing them and using them – impact all this

Good credit scores don’t just happen. They’re made.

If you don’t have good credit, there’s an opportunity to do something about it (we like to look on the positive side of things).

We’ll outline some steps you can take to help fix your credit score, aka repair your credit. But first, let’s talk about credit scores in general.

Why credit scores matter

Credit scores are essentially your debt report card. Here’s how it works:

Lenders and creditors you’ve borrowed money from share information with the three major credit bureaus about what it was like to work with you. The bureaus then turn this information into credit scores and reports. These scores and reports become important indicators to help other lenders determine if you’re going to pay them back on time.

Credit scores – let’s talk score types and score numbers

There are two main credit scores: FICO Score and VantageScore.

Both grade borrowers using scales that run from 300 to 850. The difference comes down to who does the calculating and how they label different scores. Here’s a quick overview. 

The Fair Isaac Corporation puts together the FICO Score, which has five categories:

• 800+ Exceptional
• 740-799 Very Good
• 670-739 Good
• 580-669 Fair
• Less than 580 Poor

The three credit bureaus – TransUnion, Equifax and Experian -- put together VantageScore, which also has five categories:

• 781-850 Excellent
• 661-780 Good
• 601-660 Fair
• 500-600 Poor
• 300-499 Very Poor

A poor credit score can make life a little harder. When you apply for new credit, you may get stuck with fees or a higher interest rate, or you may be denied new credit entirely.  Depending on where you live, you may pay more for car insurance for having poor credit.

How you get a poor credit score

These are just a few reasons you may have a poor to very poor credit score:

• Not paying your bills. Payments are the glue between creditors and borrowers. If you’re not making payments, creditors can alert the credit bureaus and sink your score.
• Paying your bills late. Bills have deadlines and when you borrow money, you promise to repay it and to repay it on time. 
• Not paying enough. Some bills require you pay in full, others may offer a minimum payment. Paying less than what’s required can hurt your credit score.
• Getting close to maxing out your credit. This is about credit utilization ratio, which is the portion of your credit limit you actually use. It may be reasonable to think that if you’ve got a credit limit of $10,000 that you can use close to the limit. But in the credit world, this is a bad move.

While it may seem counterintuitive, you actually don’t want to come close to using all of your available credit. In fact, you should aim to use no more than 30% of the limit on your credit card. So for a card with a $10,000 limit, you should only be using $3,000.

Other things that can lower your credit score

If you're on top of your bills and don’t max out your credit limits, but still have a low score, consider this question: What’s in your credit history?

Bankruptcy? Foreclosures? Late payments? Think these are over and done with? Think again. 

This is about how long you can expect these things to show up on your credit report: 

• Bankruptcy: 7-10  years
• Foreclosure: 7 years
• Late payments: 7 years

A note about late payments: These can only be reported on your credit report when the payment is more than 30 days late.

Late payments can hurt more than your credit score

When you pay on time – the full amount or at least the minimum amount due – lenders are happy. You’re showing them that you’re a reliable borrower.

When you pay late, not so much. Not only can it impact your credit score (if it’s more than 30 days late), but it could inflict additional financial pain. You could end up paying a late fee, and in addition to any interest you may owe, your interest rate may increase.

How to repair a credit score

Repairing credit requires patience and diligence. Not terribly exciting, we know. But repairing a low credit score is possible, and that's the key.

Here's a short list that can help you improve your credit score sooner rather than later:

1. Pay your bills on time and pay at least the minimum. 
   
   How to do this: If you owe the same amount of money every month and your balance could cover this without question, set up automatic payments. (This is like auto-deposit, but in reverse.)
   
   
2. Apply for credit only when you need it. Creditors do what’s called a “hard pull”, or hard credit inquiry, on your credit report whenever you apply for credit or a loan. Multiple hard pulls, especially over a short period of time, can lower your credit score.
   
   How to do this: As an example, let’s say a store offers you a one-time discount on your purchase if you apply for their card. If you’ve got poor credit, consider declining this offer so that you don’t get dinged with a hard pull.
   
   
3. Monitor your credit utilization ratio and avoid maxing out credit limits. Try to limit your credit use to below 30 percent of your total credit limit.
   
   How to do this: Track your purchases and your credit limits.
   
   
4. Check your credit report for mistakes and fix them.
   
   How to do this: You can order a free credit report from each of the credit bureaus – TransUnion, Equifax and Experian – every 12 months. Check for errors and fix them. Make sure your personal information and employment history is accurate, and check that each of your financial accounts is only listed once.
   
   Pro tip: Review the Consumer Financial Protection Bureau’s comprehensive checklist for help. The list also includes steps for filing a dispute if you catch an error. 
   
   
5. Give it time. Negative financial events like bankruptcy will sit on your report for a set amount of time.
   
   How to do this: We know it’s hard, but hang in there. Keep in mind that your credit report ages and the negative events on your report will have less impact as time passes.

Don’t close credit cards to rebuild your credit score

Because part of your credit score depends on how close you are to maxing out your credit lines, shutting down credit cards may not help you improve your credit score. When you close credit cards, you reduce your available credit. 

At the same time, we get it if having fewer credit cards means you’re less tempted to spend. If you really want to close some credit cards, here are some things to consider:

• Close newer cards. Lenders like to see a track record (your payment history) and with new cards, you don’t have much of a track record. Just be sure the balance is $0 before you close it. 
• Close cards you’re paying for but aren’t using. If you’re paying fees and aren’t using the card, you’re burning cash.

What about credit repair services?

Credit repair sounds like a great service, but it also comes with a cost. According to the FTC, “anything a credit repair company can do legally, you can do for yourself at little or no cost.”

If you’re determined to use a credit repair service to improve your credit score, be cautious about the service you choose. The Consumer Financial Protection Bureau highlights warning signs that a credit repair service may be a scam. Red flags include any service that: pressures you to pay up-front fees; promises to remove negative information from your credit report; refuses or avoids explaining your rights; tells you not to contact credit reporting companies. 

Still, sometimes it’s nice to have some help. If you want to use a reputable credit repair service, the Department of Justice has a list of approved credit counseling agencies.

What happens after you fix your credit score?

If you’ve fixed your credit score – Congratulations! Now it’s time to maintain your credit.

Everything you just did – paying on time, not maxing out your credit lines, taking on credit only when you need it and watching your credit reports – is what you need to do keep a high credit score.

So remain persistent. And pat yourself on the back from time to time. You deserve it.