Like so many aspects of our financial lives, rebuilding damaged credit is a marathon and not a sprint. If you need to rebuild damaged credit and repair your score as soon as possible this may not be what you want to hear. It’s still the truth.
You’ll notice that all of the strategies presented here share one common trait: none of them are quick fixes. These are not magic bullets to make your credit report suddenly appear flawless. They are legal, effective methods that actually work, unlike many hype-filled promises. Remember that there is no way to force a credit bureau to remove a legitimate entry on your credit report. If somebody’s promising that, you may be the target of a debt relief or credit repair scam.
There are three stages to repairing damaged credit: understanding your credit report, dealing with (and possibly correcting) negative entries that are already on your report and forming a new, positive credit record to improve your score. Let’s break that down into eight actionable steps.
1. Understand Your Credit Report
Start by pulling your most recent credit report. All consumers can request one free report every year from each of the three major credit reporting bureaus: Experian, Equifax, and TransUnion. For more information on free credit reports, see our guide on where to get your free credit report.
Not all creditors report to all three bureaus, so your credit reports may be slightly different. You can get all three simultaneously, but many people prefer to get one every four months, which allows you to monitor your credit at regular intervals throughout the year.
It’s critical to review all of the information reported. Some of it may surprise you, and you may have forgotten some of the entries. You may also find mistakes in your credit reports.
You may be terrified of what you’ll see on your credit report. Many people are. Don’t let the fear stop you from taking control. Credit reports can be ugly, but they can also be improved.
2. Fix Any Errors
One of the fastest ways to improve your score is to correct errors on your credit reports. The Consumer Financial Protection Bureau reports that one in five Americans has a mistake on at least one credit report.
There’s a wide range of possible mistakes. The discrepancy could be:
- The wrong name, address or phone number.
- Accounts on your profile that don’t belong to you.
- Incorrect debt information.
- Wrong balance information or credit limit reported.
- More than one listing for the same debt.
- Discrepancies in late payment information.
- An account is listed as closed, when it’s open, or vice versa.
- Other incorrect information.
In other words, there is a lot of room for error on your credit report, and these errors can do real damage to your score.
If you notice any discrepancies, look on your credit report for instructions on how to report them. You can submit disputes online or through the mail, but it is your responsibility to call attention to mistakes. If you don’t, they will go unnoticed.
3. Check Your Negative Entries
Unpaid debts and accounts that have been sent to collection agencies can do serious damage to your credit score. You cannot remove a legitimate negative entry from your credit report, but you may be able to reduce the impact these accounts have on your credit. Here are some things to try.
- Pay or settle your debt. If you pay your debt or reach a debt settlement, the entry will still be on your credit report. Closed accounts have less impact on your credit than open ones and some newer scoring models downgrade the impact of paid and settled collection accounts.
- Ask for a goodwill deletion. If you have a single negative entry with an otherwise good credit record, or if your record with a creditor was previously good, you can ask the creditor to delete the entry. They may not agree to do it, but it can’t hurt to ask.
- Pay for delete. Some collection agencies will accept a pay for delete agreement, meaning that they will delete a record in exchange for a payment. You’ll need to get an agreement in writing.
These methods may not be able to remove all records of an account from your record, but they may be able to reduce its impact.
Once you’ve done all you can to resolve your credit report issues, it’s time to build up a positive record to offset the history that damaged your score.
4. Pay Your Bills on Time
Debt can hurt your credit score, but it can also help your credit score. The single most important component of your credit score is payment history: your record of paying debts and bills on time.
Making payments late or missing payments harms your credit score. Making payments on time helps your credit score. It may be a struggle, but making every payment on time will help you get out of debt and is the single most important thing you can do to boost your credit.
5. Watch Your Credit Utilization
Credit utilization is the percentage of your available credit that you are actually using. It is a major factor in calculating your score: it’s worth about 30% of your credit score in some scoring models. You can improve your credit utilization by using less than 30% of your credit limit on all credit cards. If you can use less it will help more.
Keeping credit card balances low helps you in more than one way. If your balance is low you are more likely to pay it off in full on or before the due date. That means less money going to interest payments and more money in your pocket.
Quickly determine your credit utilization ratio using the calculator below:
➗ Go to the full page to view and use the calculator.
6. Use Credit Wisely
You need to use credit to build credit. If you’re recovering from bankruptcy or completing a debt management plan, you may have closed credit accounts, and you may not qualify for new ones. If you’re in that position, consider these alternatives:
- Use a secured credit card. A secured credit card is issued to you with a credit line that is equal to the amount you pay in a security deposit. For instance, if you secure a credit card with $500, then your credit line will remain at $500. Keep your balance below 30% of that, pay it off in full every month, and you’ll be building a positive credit history.
- Use a credit builder loan. Many banks and credit unions offer these products. The lender holds the loan proceeds in an account, you make the payments, and you get the lump sum when the payments are complete. Your credit report will show an installment loan. Lenders take minimal risk so they are willing to lend to people with impaired credit.
These alternatives will provide you with credit accounts that will be reflected on your credit report. Make every payment on time and you’ll build up a positive payment history.
7. Manage Your Accounts
You will want to avoid closing old accounts and opening too many new accounts. You might think closing an account would look better on your credit profile, but the opposite is true. Closing an account will reduce your number of open accounts and could shorten the average age of your open accounts. Closing an account will also lower your total credit limit, which raises your credit utilization.
Opening new accounts can also affect your score. Each time you open an account a hard inquiry is recorded on your profile. The impact of one hard inquiry is minimal, but if those inquiries add up it looks like you’re desperate for credit, and that can hit your score.
8. Use Credit-Boosting Services
Many of the bills you pay are not normally reported to the credit bureaus, so they do not help your credit. Several services are emerging that close this gap. Experian offers the Experian Boost program, which synchronizes with your bank account and reports your on-time utility and mobile phone payments. If you have a positive payment history, your credit score may improve.
Experian Boost can help you build your credit record with phone and utility payments… and it’s absolutely free!.
Experian Boost is specifically for utility and cell phone payments, but there is a similar program for regular rent payments. If your property manager participates in the Experian RentBureau program, you receive credit for rent payments.
TransUnion offers a similar credit-boosting program called eCredAble Lift, giving you the ability to affect another one of your credit reports.
Time is On Your Side
The process of rebuilding damaged credit can feel unbearably slow, but time eventually works in your favor. Negative entries on your credit report drop off within specific time frames. Here is a snapshot of how long negative marks stay on your profile:
- Late payments are reported for seven years from the first missed payment.
- Public record items also remain on your report for seven years.
- Bankruptcies are on your report for 7 to 10 years.
- Hard Inquiries remain for up to two years.
In each case the impact of the entry on your credit score will decline as the entry ages.
To summarize, rebuilding credit requires several steps.
- You’ll need to understand your credit reports and the way that your credit score is generated.
- You’ll need to spot and dispute any inaccuracies and discrepancies and do what you can to resolve negative accounts.
- You’ll need to follow up by making positive changes going forward, managing your finances in a way that boosts your credit score.
These strategies will slowly but surely improve your score. You’re also likely to find that you’re improving the overall state of your finances. That combination of benefits is worth the time and effort!
Do you still have any questions about how to rebuild damaged credit? Let us know in the comments below?