5 Ways to Repair Your Credit

what is a good credit score

If you've applied for credit recently and been turned down, you know the sting a low credit score can cause. While you may see ads that claim to fix your credit quickly, the truth is, depending on the reason for your low score, boosting your credit score can take time.

If your credit report has incorrect negative information it can take a few months to have it removed, but valid negative information such as a foreclosure or bankruptcy will stay on your credit history for 7 to 10 years. An unpaid tax lien will stay on your credit report for indefinitely and a judgment will be on the report for 7 years.

However, even with some negative facts on your credit history you can improve your credit score yourself over time.

What is "good credit"?

"Good credit" isn't an exact number, but depends on multiple factors that go into your credit score and the risk tolerance of a creditor. If you're applying for a car loan or a mortgage, each lender will review your credit history in the context of other information. That said, many creditors view a FICO (Fair Isaac Corporation) credit score of 740 as optimal to receive the lowest interest rates on a loan. According to research by FICO in 2012, 38 percent of consumers have credit scores between 750 and 850, while 15 percent have credit scores between 700 and 749. The researchers found that 32 percent of consumers have credit scores between 550 and 699. Fifteen percent of consumers have the lowest credit scores, between 300 and 549. The Wall Street Journal said the average credit score in April 2012 was 690.

Start with your Credit Report

request your credit report and dispute errors

By law, you can request a free credit report from each of the three credit bureaus (Experian, TransUnion and Equifax) once per year at annualcreditreport.com. You'll have to pay a small fee to get your credit score from each bureau.

Once you have your report, review it for errors and an explanation of any negative information. A recent study by the Federal Trade Commission (FTC) showed that one out of every four consumers had a mistake in their report that could impact their credit score. Each credit reporting agency provides information about how to dispute a mistake. You'll need to contact the agency and the original creditor in writing.

Tips to dispute errors:

The Federal Trade Commission recommends that consumers who are disputing errors:

- Put their challenges in writing

- Send letters by certified mail with a return receipt

- Keep detailed records of every letter or phone call related to the dispute

Improve your Credit Score

ways to boost your credit score

If your credit reports are accurate, the next step is to change your financial behavior.

According to FICO, one of the most important contributors to a better credit score is paying your bills one time. Take these steps to boost your credit score:

Set up payment alerts.

You can use an online banking system or request email alerts from your creditors to remind you to pay a bill. Another option is to set up automatic payments through your creditors, but this typically only makes the minimum payment and won't help reduce your balance.

Get current on your bills.

Take any available cash and bring all your accounts up-to-date to improve your score and eliminate late payment fees and over-limit fees.

Pay down your debt.

Andrew Sprauve, director of public relations for FICO, says that you should aim to keep your use of credit below 20 percent of your credit limit. Stop using your credit cards and tackle one card at a time to pay down your balance. Start with the smallest balance for a psychological boost or pay down the debt with the highest interest rate.

Don't close any accounts.

You may want to eliminate your credit cards, but this could actually hurt your score because you'll have a lower amount of available credit and your credit utilization will be higher.

Don't open new accounts.

Applying for new credit can cause a negative impact, but in the long-term, having a lower percentage of debt compared to available credit can be a plus.

Depending on the level of your credit problems, improving your score could take months to a year or more. The sooner you start making changes, the faster your score will rise.