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How to Repair Bad Credit

by Brandon Cornett, 10/18/08

Have you recently applied for a loan and been told your credit was too bad to be approved? If so, you already realize the importance of repairing your credit, so I don't need to belabor that point. Instead, let's move on to the good stuff. Let's talk about how to repaid a bad credit score by taking the specific actions below.

Steps to Repairing a Bad Credit Score

If you ask 12 different financial experts how to repair bad credit you will likely get 12 different responses. People have their own opinions on where you should start, in what order you should proceed, etc. But those same experts will also agree that the items presented below are the best ways to start repairing your bad credit score quickly.

1. Fix Errors in Your Credit Reports

When you talk about repairing credit, it can really mean two different things. First of all, it can be used as in the context of this article — to repair a bad credit score so that you can qualify for financing. But the phrases can also refer to repairing errors found within one or more of your credit reports. And this too is an important step in the process.

Did you know you have three different credit report maintained by three different companies? It's true. Not many consumers realize that. So one of the first things you need to do in your quest to repair your credit is to order copies of all three reports and check them for errors. Having erroneous information in your credit reports (such as a loan or line of credit that's not actually yours) can lower your score unnecessarily. And obviously, that's the last thing you want.

You can order your reports directly from the companies who produce them, if you want. Experian, TransUnion and Equifax actually have a jointly owned website where you can do this. It's called AnnualCreditReport.com. By law, you are actually entitled to one free credit report per year, from each of the three companies mentioned above.

If you want to purchase a package deal that gives you all three reports, all three credit scores, and a monitoring service to help detect and prevent fraud, you can order it through a company like Credit.com:

Special offer from Credit.com: Credit reports, scores and monitoring


2. Reduce Your Credit Card Debt

This is one of the best ways to repair a bad credit score, and it's something most experts agree on. Many Americans have a lot of debt in the form of credit card balances. You can improve your financial picture in many ways by setting up a budget that allows you to pay down these balances — or better yet, to eliminate them altogether.

In addition to repairing a low credit score, this will also help you improve your debt-to-income ration or DTI. Lenders will also evaluate your DTI when considering you for a mortgage loan. If you spend a lower percentage of your gross monthly income on monthly debt (like those credit card payments), you'll be more likely to get approved for a loan. Now you can see the overlapping benefits of this strategy. It helps you repair a bad credit score, it improves your debt-to-income ratio, and (perhaps most importantly) it lifts a burden off your shoulders to improve your quality of life.

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3. Be Careful When Closing Credit Accounts

It's generally wise to close old credit accounts you are no longer using, or any accounts that have small balances you can easily pay off. Doing so will reduce the likelihood of credit report errors, as well as the chance of financial fraud and identity theft. It can also help you with your goal of repairing bad credit.

But you need to be careful which accounts you close. Closing your oldest account can shorten your credit history, which could in turn lower your score. So it's best to start with the newer accounts and keep the oldest ones, in most cases anyway. Often, when people are learning about how to repair bad credit, they gloss over something that says "close old accounts" but they don't read the fine print. So they end up closing the oldest one, which has a better-than-average chance of lowering your score. Keep this in mind when making such decisions.

4. Avoid Late Payments at all Costs

This is one of the most common reasons people end up with bad credit in the first place (the other one being bankruptcy). So when considering ways to repair credit you must also consider why it needs repairing to begin with. If you have a habit of missing payments on car loans, student loans, credit cards or other forms of debt, you must find a way to correct it.

For many people, forgetfulness is the root of the issue. They simply forget to make payments. They pull bill out of the mailbox, toss them aside, and completely forget about them until they start getting late notices. If this describes you, you'll be happy to know there's an easy fix — auto pay.

Nearly all finance companies these days will offer some kind of auto-pay / auto-debit system through which you can pay your bills automatically. Basically, this process will electronically connect your checking account to the bill payment system of the company you send those checks to each month. So instead of having to mail checks (and forgetting about it), it happens automatically. All you have to do is keep an eye on your checking account to reconcile / verify all of the deductions.

As long as you have sufficient funds in your account, you will never miss another bill payment. This is one of the first things I recommend for people who are seeking ways to repair bad credit — because it's also one of the easiest.

You can also register your credit cards online through the company that provides the card. The service will send you email reminders when your payments are due, which will reduce the chance that you miss the payment.

Conclusion and Going Forward

It's important to realize that repairing a credit score takes time and persistence. So the sooner you can start a campaign to repair bad credit ... the better. Why go through all the trouble? Well, if you've tried to get financing lately (for a car, a home or a student loan), I probably don't need to give you an extra motivation. Being turned down for a loan because of your credit is a slap in the face, so it's probably the only motivation you need.

But if you need a little push in the right direction, let me offer you this insight. Because of the mortgage crisis that came to a head in 2008, it's a lot harder to get qualified for a home loan these days. Banks are requiring borrowers to have better credit than ever before to qualify for the best interest rates on a loan. They are also turning a lot of people away — people who would have easily qualified for a loan in the past. So while bad credit has always been a problem for consumers, it will create even bigger problems for you in the coming months and years.

If that doesn't motivate you to start repairing your bad credit then nothing will. I wish you well on your journey to better financial health, and I hope this article helps you achieve success in this area of your life. Good luck!

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Brandon Cornett is the creator of the Home Buying Institute. He created this section of the website to help people with bad credit get back on track. If you have a low credit score and are trying to improve, check out this related section of our website.

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