A step-by-step process on how to repair credit
Is bad credit getting in your way to affordable loans? It could be as a result of a collection account, an overdue loan, foreclosure, or even negative remarks on your credit report from a creditor.
With bad credit, getting approved for any loan product can be a real hassle. If you get approved, it will be at an exorbitant interest rate compared to someone with a good credit score.
The good news, however, is that you can repair your credit on your own and consequently improve your credit scores.
In this guide, we’ll discuss what you need to know about credit repair and a step-by-step process on how to repair credit.
Let’s dive in!
What you need to know about credit repair
Contrary to popular belief, fixing your credit is not difficult. Many people hire credit repair companies to help them fix their credit when they can actually do it on their own.
These companies take advantage of vulnerable citizens with a promise to give them a particular credit score, remove negative items on their reports instantly, or even remove inaccurate information within a day. This is far from the truth, and these individuals end up losing thousands of dollars to scammers.
The truth is, you can easily fix your credit and save yourself the expense. All you need is a little patience and know-how on how credit works.
In an attempt to protect consumers who still feel less confident in repairing their credit themselves, the Credit Repair Organization Act was established, and it:
- Prohibits credit repair companies from giving false claims on the services that they can offer to consumers.
- Prohibits asking for money before the services are complete and the customers satisfied.
- Ensures a written contract is signed by the company and the consumers on the services provided, and the terms and conditions of payment. Customers are allowed to back out of the contract after 3 days.
- Forbids clients from lying about their identity and their credit accounts in an attempt to change their credit history.
As you work on fixing your credit, here’s what you need to know about credit repair
- It will not happen overnight
Rebuilding a bad credit history takes time. You’ll have to exercise lots of patience during the process.
The time it takes, however, depends on an individual and how bad your credit was.
As you change your credit utilization habits, pay your bills on time every time, and maintain a favorable credit limit, you’ll see a significant change in your credit score.
As time goes by, the old negative items and remarks on your credit reports about late payment will fall off, and the new trend will cause a rise in your ratings.
It’s, therefore, important to maintain the trend because an improvement in your credit scores is dependent on the new information.
- If you don’t change your spending habits, the process may be worthless
Some of the reasons why people repair their credit are to apply for car loans, mortgages, or get personal loans at affordable loans. This is perfectly okay only that it may take you back to the same spot if you are not cautious.
Taking large loans that you cannot pay will affect your credit. If you want to maintain a healthy credit, take out loans you can pay without missing payments.
Also, ensure that you pay all your bills in time to avoid any negative reports.
- You don’t need a credit repair company because you can do it alone
Credit repair companies will give you promises that they cannot fulfill.
They’ll ask you to make some down payment to get a particular credit score, have some information on your credit reports removed or even delete some negative items on your file instantly.
Truth is these companies are untrustworthy, and there’s nothing they can do that you cannot do.
You can repair your credit as it gives you more control over your scores and saves you money than when you have someone else do it for you.
There are several strategies you can employ while repairing your credit like disputing anomalies, paying for delete, goodwill letters, and debt validation.
- Credit repair affects the information on your credit reports, and not your scores
If you have decided to build your credit, the first step is to check your credit reports.
You can easily access your credit reports by downloading free credit reports from annualreports.com
If you notice any errors, you have a right to raise a dispute to the credit bureaus and have the mistakes fixed.
The credit bureaus will then check with your creditors and respond to your inquiry. The information on your credit reports will then be corrected, and this will ultimately cause an increase in your credit scores.
- It’s important to monitor your credit
If you track your credit regularly, you’ll easily pick out when there’s a rise or fall.
While the information on your credit reports may not help you know your credit standing, it will affect your credit score.
To ensure that you don’t live in bad credit, make sure that you repair your credit often so that there are never any errors that may negatively affect your credit standing.
A step-by-step process on how to repair credit
Below is an easy-to-follow procedure on how to repair credit:
- Download and check your credit reports
You can get your free credit reports once a year from annualcreditreports.com
Go through them carefully to ensure that all the information is accurate.
Apart from errors in your report, you also need to check out for any items on your credit that you don’t know about as this could be a sign of fraudulent activities or identity theft.
If you notice any anomalies, raise a dispute with these credit bureaus and have the information corrected.
- Work on your payment history
Among the things that affect your credit is missed payments.
FICO uses your payment history as a component when giving you a credit score.
It is, therefore, important to pay off your bills on time as missed payments will negatively affect your credit score.
Negative remarks or items like collection accounts, bankruptcy are likely to stay in your reports for 7-10 years after which they’ll fall out.
- Check out your credit utilization rate
Credit utilization rate is the amount you owe compared to the available credit at your disposal.
A high credit utilization rate can negatively impact your credit scores. It’s, therefore, important to keep it low usually below 30%.
Let’s say your credit limit across your credit cards is $10,000. You need to keep the credit balances at or below $3,000.
You can achieve this by:
- Reducing the credit card balances.
- Opening a new credit account or raising your credit limit.
The most viable option would be to reduce your debt as this will consequently improve your credit standing.
Raising your credit limit or opening a new account, on the other hand, is riskier because you are likely to be tempted to use more credit and plunge yourself deeper in debts. Opening a new credit account would also mean the card company will make an inquiry on your credit and this will subsequently reduce your credit scores.
- Don’t spend more than you earn
It’s important to have a budget on how to spend your monthly income.
Usually, the best way to repair your credit is to pay off all bills on time, avoid new loans and pay down your credit debt. You can only achieve this by having a plan.
Have an estimate on how much you spend on expenses like mortgages, car loans, personal loans, rent, and insurance.
It could also help to change your spending habits on things like groceries, gas, and entertainment. Also, Create a credit limit and avoid impulse buying.
This will ultimately free up some cash that’ll help you make on-time payments towards your debt obligations.
- Avoid new credit
Every time you apply for new credit, the credit company performs an inquiry on your credit. This will negatively affect your credit scores.
If you have too many of these inquiries performed on your credit, it may take a while to see your credit scores improve.
- Pay off your bills on time
This is so far is the best way to build bad credit.
If you had overdue loans and bills that have stayed for a long period of time, make sure you create some money and pay them off.
On-time payments will increase your credit scores and improve your credit ratings.
When making lending decisions, lenders check on a borrower’s credit reports.
Bad credit history or low credit is an indication that you are a risky borrower and may not pay off your debt.
This will lead to your loan request being rejected, or you may end up paying double digits interest rates.
While negative information may take 7-10 years to fall off your credit reports, you can still rebuild your credit history by paying off your bills on time, avoid taking loans you cannot afford and keeping your debt utilization rate low.
Repairing your credit is a good way towards improving your credit standing. It would do you so much good if you changed your spending habits to avoid falling back.