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Having a bad credit report and score can throw a big wrench into your financial life.
You’ll have more difficulty obtaining loans and credit cards than people with good credit, and, if you do get a loan or card, you’ll usually pay a higher interest rate than people who have good credit. You also won’t be eligible for credit cards with the best rewards and benefits.
If your credit is bad, don’t despair – there are quite a few practical steps you can take to begin reversing your situation and put yourself on track towards good credit.
There are four key steps involved in repairing your credit:
- Fix Mistakes in Your Credit Report
- Learn Responsible Credit Habits
- Negotiate with Creditors and Collection Agencies
- Build New Credit
You can pursue them one after the other or all at the same time. You can undertake this process by yourself or you can look for help from a credit repair service.
Step 1: Fix Mistakes
If you have poor credit, it may not all be your fault. Your credit report may contain errors and mistakes that are dragging down your credit rating.
Therefore, your first step toward credit repair is to obtain a copy of your credit report and go over every bit of information to ensure that everything is accurate. That includes everything from the spelling of your last name to whether you ever had a credit card account with Sears.
If you find any errors, take steps to correct them as soon as possible. This includes adding any positive information that has been omitted, like a missing loan or credit card account.
Fixing errors on your report is a quick and easy way to boost your credit. The bigger the errors, the more improvement you’ll see.
If you have any fraudulent or unverifiable accounts on your credit reports, you can have them removed by sending 609 dispute letters to the credit bureaus. These letters will require the credit bureaus to attempt to verify the accounts, and, if they can’t be verified, they’ll have to be removed. But take note that this process could also remove a positive account that was helping your credit scores, if that account can’t be verified.
If you’ve dealt with fraud in the past or are concerned about it now, you can place credit freezes or credit locks on your credit reports as an added layer of protection. These will prevent anyone from opening up new credit in your name, until you thaw or unlock your reports.
Step 2: Learn Responsible Credit Habits
If your credit is hurting because of your financial behavior, you’ll need to learn the fundamentals of responsible credit use. This includes credit cards, loans, mortgages, and any other financial obligations you might have.
For most loans, the basic principle is simple: don’t borrow more than you can afford to pay back, and always make your payments on time. This simple strategy will almost always be good for your credit.
But credit cards are a bit more complicated, and will affect your credit in several different ways. You still need to borrow within your means and always pay your bills on time, but there are other factors to take into account as well. Learn how to use your credit cards responsibly and your credit score will thank you.
Step 3: Negotiate with Creditors and Collection Agencies
If you’re having trouble paying your current debts and have others being handled by collection agencies, you can take steps to manage those debts. To deal with current debts, first make sure you understand some basics about paying down large balances.
If your current payment plans are too expensive for you to pay, there may be some room to negotiate. Contact the card companies and lenders, explain your situation, and ask if you can work out more realistic payment plans. Once in place, these payment plans should help you avoid late payments that can continue to drag down your credit rating.
It may also be possible to pay off your balance completely for less than the total cost. If you can afford a large lump sum, you may be able to negotiate to pay off a large amount of credit card debt all at once.
Step 4: Build New Credit
You’ll want to build up positive accounts on your credit report to offset the bad. There are quite a few ways you can do this, and the right actions for you to take will depend on your particular situation.
Credit cards can have a profound impact on your credit, and that impact can be positive or negative. Take some time to learn how to build credit with credit cards, and see if any of those strategies will work for you.
Q&A Video: What are the Easiest and Most Effective Ways to Build Credit?
Step 5: Wait
In general, the only thing that will remove valid negative entries on your credit report is time. Late payments, accounts turned over to collections, and so on will typically remain on your credit report for seven years. In rare cases you may be able to get valid late payments removed, but you shouldn’t count on it.
There is nothing to do about those entries except to wait until they are removed from your report automatically. Once they do come off, you’ll see your credit scores go up.
The new accounts you build and your responsible behavior will also take some time before their effects are felt. The key is to be patient and stick with your strategies. By staying responsible, even people with the worst credit can eventually qualify for loans and credit cards with great rates.