Having a good credit score is essential to ensuring access to credit products with favorable terms and lower interest rates. Without a good credit score, lenders will view you more skeptically, and you might be denied a loan, credit card, or other type of credit product. With this in mind, understanding how to repair bad credit is a must.
Unfortunately and all too often, people are not taking the necessary steps to repair their credit when they need to. While credit repair is not an overnight fix, with discipline and dedication, repairing your credit rating is possible. There are seven key steps you should always take when trying to repair your credit:
1. Check Your Credit Report
2. Fix Errors on Your Credit Report
3. Pay Off Outstanding Debts
4. Reduce Your Credit Utilization Ratio
5. Open Up a Secured Credit Card
6. Become an Authorized User on Someone Else’s Card
7. Dispute Negative Items
These steps can help you successfully repair your credit and ensure you obtain favorable credit terms.
1. Check Your Credit Report
Before taking any steps to rebuild your credit, you must understand how it is currently structured and what is affecting it. Checking your credit report with each of the three major credit bureaus (Experian, Equifax, and TransUnion) is the best way to start.
Everyone is entitled to a free copy of their report every year by visiting AnnualCreditReport.com. Once you have all three credit reports, review them carefully to identify any mistakes or errors that might be damaging your credit standing.
2. Fix Errors on Your Credit Report
Once you have identified any errors on your credit report, the next step is to take action. Dispute any inaccuracies with the credit bureaus by filing a dispute. The credit bureaus must investigate within 30 days and report back with the results. This is a good way to remove inaccurate or outdated items from your report and possibly improve your credit score.
3. Pay Off Outstanding Debts
Outstanding debts are a major drag on your credit score and must be paid off in order to improve your credit profile. Start by creating a budget and prioritize paying off the debts with the highest interest rates first. As you pay off each debt, your available credit increases, which can help improve your credit utilization rate —another important factor in determining your score.
4. Reduce Your Credit Utilization Ratio
Your credit utilization rate is an important measure of how responsible you are with credit. It is generally advised that you use no more than 30% of your available credit at any given time so it is important to monitor this closely and keep it under this limit. To reduce your credit utilization ratio, you should start by paying off any existing debt and then practice strict credit practices moving forward to keep this figure low.
5. Open Up a Secured Credit Card
Opening a secured credit card is a great way to start rebuilding your credit. Secure credit cards require a deposit, usually of $200 to $300 to open. There are also no annual fees associated with this type of card.
Secured cards may also offer additional features such as travel rewards points and cash back. Additionally, your credit card activity is reported to the three major bureaus each month. This helps to give you a better track record on time payments and available credit which can help improve your score.
6. Become an Authorized User on Someone Else’s Card
Another way to build your credit score is by becoming an authorized user on someone else’s card. This is an excellent strategy if you have a family or partner that is willing to add you as an authorized user. As an authorized user, you will require no additional deposit or credit check. This can help improve your score as it leads to a positive credit history with no additional effort on your part.
7. Dispute Negative Items
Finally, if there are any negative items on your credit report that you believe to be inaccurate, you should dispute them with the credit bureaus. You can dispute any item on your report that seems to be inaccurate or incomplete. When disputed, the credit bureau has 30 days to investigate the item and respond with the resolution.
Final Thoughts
Having a poor credit score can complicate many aspects of your financial life. Thankfully, credit repair is possible with the right steps. While it is not an overnight fix, following the seven steps outlined in this article will help you successfully repair your credit.
To recap, your credit repair process should include checking your credit reports, fixing errors, paying off debts, reducing your credit utilization ratio, opening up a secured credit card, becoming an authorized user, and disputing negative items. The commitment to repairing your credit is a long term investment that will eventually lead to access to better terms and more favorable rates when obtaining credit.
