Updated: Nov 5, 2021
Ways to Repair Your Credit
Estimated read time: 6 minutes
Despite being one of the most important factors of your financial health, credit often goes overlooked, right up until the point that it becomes vitally important. For many, this moment happens when they attempt to borrow for a home or to finance a car, only to find their credit score won't let them do it.
Your credit score is essentially a numerical value attributed to how safe you are considered by creditors and lenders. If your credit score is low, they use that to assume that you are less likely to be able to stay consistent with the details of a credit agreement. A low credit score can make it harder to find a loan, harder to negotiate the terms of a loan, and even harder to pay a loan due to higher interest rates and shorter payment periods leading to bigger monthly payments.
However, having a low credit score isn't the end of the story. There are ways to build that credit once more and ensure a better borrowing future for yourself. Here are some ways to repair your credit.
Investigate Your Credit Report
First of all, it's a good idea to get an idea of where you are and where you want to be. A "good" credit score is considered anything above 670, while any credit score is beneath 579 is considered "very poor". Getting a copy of your credit report helps you understand your current score, but it also helps you get a better look at what black marks might currently be on your record. Your record will show things like missed bills and defaulted loans if you have them. Yet many people find erroneous reports there as well, such as bills they have paid on time but have been marked as unpaid or paid late and, sometimes, records that have been attributed to them wrongly. If you find such reports, it's important to dispute them with the creditor so they can be stricken from the record. Every 12 months, you're entitled to a free credit report from the three big credit reporting agencies: Experian, Equifax, and TransUnion so don't neglect to check up on it each year.
Pay Your Bills On Time
The single biggest determining factor that contributes to your credit score is your reliability when it comes to following the details of credit agreements you have with others. For most people, this means paying the bills on time, whether it's your rent, utility bills, service providers, and loan repayments. If you're unable to make your bills on time, it will show up on the credit report, so it's better to close any credit agreements you're unable to keep up with. Setup payment reminders to make sure you're aware of upcoming bills so you never fall behind.
Pay Off all Your Existing Debt
If there are any bills you have fallen behind with or debts that you have amassed over time, the sooner you work to get current with them, the better it will be for you. Rebudgeting your finances and reducing your expenses can help you free up more money to get current quicker. For some, debt consolidation can help you get better interest rates and more flexible payment arrangements that can make it easier to manage existing debt. Your credit report can help you make a list of all the creditors you owe to ensure you don't neglect any.
Avoid Letting Creditors Get Collections Involved
When you're dealing with your creditors directly, you still have some wiggle room to negotiate with them if you're having trouble managing repayments. However, if you avoid your creditors while you owe them money, they will become more likely to get collections agencies involved. Beyond the fact that there is no negotiating with collections, it's also worse for your credit score. Even after paying off a collection's agency, their record on your credit report will remain there for some time, negatively affecting your score. They will stay on the report for seven years from the time they are filed, so avoid having collections involved in the process at all.
Use a Credit Card (Responsibly) to Build Your Credit Score
Getting current with creditors, keeping up with all your bills, and avoiding collections agencies can help you avoid taking any hard hits to your credit score. But what about repairing the score? The best way to do it is to show that you're able to meet your obligations to credit agreements. Opening up a credit card and using it regularly and responsibly is one way to do it, and there are no-credit credit cards for the purpose of helping people build the credit history they need from scratch, too. Note that the utilization rate is also important, not just having an open credit card. You need to both use and reduce or pay off your credit card balances if you're to see a positive effect in your credit score.
Don't Close a Credit Card that You're Not Using
If you're trying to become current with all of your credit accounts and you want to make sure you don't make any mistakes that could hurt your score, it may be tempting to close a credit card. You might not need it anymore, but you should consider whether it's really a good idea. Not using or not having credit cards will not help you repair your score any sooner. If you open a credit card, don't use it at all, and close it again, it can actually slow the rate of your credit score repair. Even if you're not using it, keep it open until you're in a financial position that you can use it responsibly.
Become an Authorized User of Another's Credit Card
If you have no credit history of your own or you are unable to apply to any credit cards with terms that allow for affordable, responsible usage, there may be another option available to you. You may be able to become an authorized user on another's card. As an authorized user, you aren't responsible for paying the balance that accumulates on the card, so the effect it has on building your credit score is minimal. However, it does build a credit history that can encourage other lenders to look at you more favorably, opening the door so you can apply to credit agreements of your own. Of course, trust is essential when sharing any kind of credit agreement with another, so this should only be done with others that have mutual trust with you to avoid any friction or disputes down the line.
Avoid Applying for Loans You Won't Get
When you apply for a loan or a new creditor agreement, the creditor will run a check on your credit report. It's one of the key factors in deciding your eligibility. However, when they run a hard check on your report and reject your application, this has a negative impact on your credit score. To put it simply, it's a record that this creditor doesn't trust your reliability as a borrower, so others are less likely to. For that reason, take your time in researching what will make you eligible for a successful loan application before you start the application process. Pre-approval is offered by many creditors, but it's not always accurate so don't rely on loan pre-approval or eligibility checks alone. It does not affect your credit score when you perform a check on your own report, however, so don't worry about that.
Be Picky with Loan and Card Applications
Even if you are successful in applying for a loan or credit card, you shouldn't then go on to apply for a dozen more. Applying for multiple loans and cards at once is a sign of irresponsible borrowing. Even if every single one of those applications is successful, it can have a net negative effect on your credit score. Only apply for loans and credit cards as and when they are needed and be picky with those you open to ensure you're able to stick to the terms of the credit agreement without issue.
Be Patient
All the tips mentioned above will help you encourage the growth of your credit score and help you avoid any mistakes that could slow or reverse your progress. However, except for having erroneous records removed from your credit report, none of them are quick fixes. It takes time for a credit score to repair and the lower your score is, the longer it will take it to reach a healthy point again. Be aware you might be waiting some time for your credit score to reach the point you want it at and keep up the good habits that are helping it grow.
It takes time and effort to repair your credit score and establish a positive record that can help lower interest rates and improve your ability to apply for different credit agreements. However, if you follow the tips above, you can start the work of repairing the damage all the sooner.