How To Repair Your Credit: 15 Steps For Success

When you apply for a mortgage, lenders use your credit score to measure how much risk you pose as a borrower. Good credit makes getting approved for a mortgage easier and gets you a lower interest rate, saving you money. A lower credit score usually means it’ll be more challenging to get mortgage approval, and you’ll pay more for it if approved.

If your credit score is low, waiting on buying a home until you can improve it can save you money. Here are 15 steps you can take to fix your credit score.

Key Takeaways:

How To Check Your Credit

You’ll first need to check your credit history with the major credit bureaus: Experian, Equifax and TransUnion. Federal law requires credit bureaus to provide each person a free copy of their credit report once per year. In 2020, the bureaus offered free weekly credit reports in response to the COVID-19 pandemic and have since made that change permanent.

You can request your free credit report online at AnnualCreditReport.com or by calling 877-322-8228.

Note that free credit reports will include your credit history but not your credit score. You may have to pay each credit bureau a fee to see your credit score, though the score the lender sees may vary depending on which credit score model it’s using. Each credit bureau gets its information from different sources, so a report from one bureau may not match another.

If your credit report suggests someone is trying to use your identity to open credit accounts or make purchases, you can report it at IdentityTheft.gov and get a recovery plan.

What’s A Good Credit Score?

There are several types of credit score models. The FICO score, developed by the Fair Isaac Corp., is the most popular model, used by an estimated 90% of top lenders. VantageScore is another common model. Both have a range from 300 to 850 and commonly fit into the following categories:

Now, let’s take a look at the minimum credit score requirements for some different types of home loans:

The average FICO score is 717,

and the average VantageScore is 705.

^[2]

Both are in the good range and surpass the minimum required for most mortgages.

What’s A Poor Credit Score?

If your credit score is in the fair range, your credit history isn’t terrible, but you have room for improvement. If your credit score is in the poor range, you likely will have trouble getting approved for a loan, and if you do get approved, you can expect to pay a higher interest rate.

“Your credit score likely needs repairs if you are having trouble getting approved for loans or securing an apartment in your name,” says Leslie Tayne, a financial attorney and credit and debt expert at Tayne Law Group in Melville, New York.

15 Steps To Fixing Your Credit

If your credit score needs improving, you can take steps to improve it.

“If you increase your credit score and repair your credit, you will likely see lower interest rates in the future and credit approval,” Tayne says.

1. Monitor Your Credit

Keep an eye on each bureau’s credit reports and know your credit score. Pay close attention to the accounts’ accuracy, your personal information, and any delinquencies or credit inquiries. If there’s accurate negative information – like missed payments or large debts – you’ll know why your credit score was dinged.

“You won’t be able to fix your credit until you know what is negatively affecting it,” Tayne says. “If you access all three credit reports from AnnualCreditReport.com, you can verify that the information in each report is accurate.”

If there’s incorrect negative information, you can do something about it so your credit isn’t negatively impacted.

2. Dispute Errors On Your Credit Report

If you find errors on your credit report, it’s important to flag it and dispute it with the credit bureau. Despite what credit repair companies may say, it’s free to dispute mistakes or outdated information on your credit report. The credit bureau is responsible for correcting any mistakes. You can dispute errors on your credit report by contacting the three major credit bureaus here:

3. Stay Well Below Your Credit Limits

Just because you have credit doesn’t mean you need to use it. Credit scoring models consider your credit utilization ratio – a figure that compares how much you owe with your available credit. A low credit utilization ratio shows you don’t need to use all your credit, improving your credit score. You can reduce your credit utilization ratio by paying down your debts or increasing your credit limit.

4. Try To Pay Your Balances In Full

Paying off your balances in full will keep your total debt low and boost your credit score. It may tighten your budget to pay your full monthly credit card balance, but not doing so will cost you more in interest and reduce your credit score.

5. Make Payments On Time

Late or missed payments will damage your credit and remain on your credit report for seven to 10 years. Bankruptcies can be even more destructive to your credit. The more debt you have and the more recent the missed payments are, the more it will hurt your credit score. Consistently making debt payments on time can help you improve your credit.

6. Pay High-Interest Accounts First

Different types of loans and lines of credit come with varying interest rates. For example, credit cards notoriously come with high interest rates compared with secured loans. So, if you have credit card debt with a high interest rate and a secured personal loan with a lower rate, focus on chipping away at the credit card debt first. That way, you’ll be charged less interest overall instead of adding more to your total debt.

7. Catch Up On Any Late Accounts

If you have any past-due accounts, make it a priority to get them paid and current. Remember, payment history has the most significant impact on your credit score. Any payments that are 30 days or more past due can be reported to credit bureaus and hurt your credit score. Late payments will remain on your credit report for up to seven years. Even one late payment can ding your credit score. The more delinquent the payment is, the more it will hurt your credit score. If you’re behind on any payments, be sure to take action before 30 days have passed.

8. Use Autopay To Avoid Late Payments

It’s understandable to see a bill, make a mental note to pay it, and then forget. However, setting up autopay for your bills can prevent this. You’ll just need to make sure you have enough money in the account linked to pay them. When it comes to credit cards, you can automatically pay the minimum balance so the payment isn’t late and you don’t overdraft your checking account. That said, it’s best to pay off credit cards in full each month if you can.

9. Keep A Low Credit Utilization Ratio

You can calculate your credit utilization ratio by adding up all your debts and dividing that number by the total of your credit limits. Then, you multiply that by 100 to turn it into a percentage. Having a high credit utilization ratio shows you’re using a lot of your available credit, which can reduce your credit score. The lower your credit utilization ratio, the better, but as a general rule, keeping it under 30% is a good idea.

You can work toward reducing your credit utilization ratio by paying down your account balances. It can also help if you open a new line of credit to increase the total amount of credit available. Just be careful to use that credit line responsibly and avoid accumulating more debt.

10. Pay Down Your Debts

Letting debt accumulate or only paying the minimum amount due can cost you more – especially if it’s high-interest debt like a credit card. If you have a considerable amount of debt and you don’t have the cash to pay it off, you’ll need to make a plan.

One strategy is the debt snowball method, where you get rid of your smallest debt first and then put that monthly payment toward the next-smallest debt. Another approach is the debt avalanche method, which pays off the highest-interest debt first.

Another option is a debt consolidation loan, which lets you pay off multiple high-interest debts with one loan and one monthly payment. This type of loan typically comes with a lower interest rate than your credit cards, but it can be hard to get favorable terms if you have bad credit.

11. Avoid Hard Inquiries

When you apply for a new loan or line of credit, the lender will check your credit to see how much risk you pose as a borrower. This appears on your credit report as a hard inquiry, which you can expect to reduce your credit score by less than 5 points and remain on your record for two years. Multiple inquiries in a short time can count as only one hard inquiry, which allows you to shop around for the best deals without penalty. 

12. Avoid New Credit

Opening multiple new lines of credit will put hard inquiries on your credit and hurt your score because lenders see it as higher-risk behavior. So, if you’re planning to buy a home soon, it’s wise to avoid opening new credit accounts.

13. Keep Unused Accounts Open

If you’ve finally paid off a credit card, it may seem like a good idea to close the account to avoid the temptation of accumulating more debt. However, having unused credit can give you a low credit utilization ratio and have a positive effect on your credit score. Credit scoring models factor in the age of your oldest credit line and the average age of your accounts. Keeping an older account open can also increase the average age of your credit lines. Instead of closing the account, you can just leave it open and only use it occasionally.

14. Consider Credit-Building Projects

Generally, it’s wise to work on paying off your debt to boost your credit score. But there also are ways to borrow that can help you build your credit.

Credit-Builder Loans

Credit-builder loans are designed to help borrowers build or rebuild their credit. These are typically smaller loans of up to $1,000 with repayment periods of six to 24 months. That money is kept in a savings account or certificate of deposit while you pay it back. Once you have paid it off in full, you’ll receive the money in the account. In the meantime, your on-time monthly payments will be reported to the credit bureaus and help you boost your credit score.

Secured Credit Card

A secured credit card works a lot like a traditional credit card. The key difference is that it requires you to pay a refundable security deposit equal to your credit limit. This deposit reduces the risk posed to the card issuer because they can use it to pay off your balance if you default. It’s best to use this card for smaller purchases to keep your monthly payments manageable. Paying off your secured card in full each month can help you improve your credit.

15. Sign Up For Credit Counseling

Credit counseling organizations are available to advise you on your finances and rebuild your credit. These are typically nonprofit organizations that help you make a personalized plan for a small fee or even for free. Here are some reputable organizations that can connect you to a credit counselor:

Repairing Your Credit With A Credit Repair Company

You may see ads for companies that promise to improve your credit in exchange for a fee. Many of these are scams, which charge expensive fees to find and dispute negative information on your credit report. The truth is that credit repair companies do nothing for you that you can’t do yourself, and they can’t remove negative information if it’s accurate. They also can’t remove hard inquiries, and you don’t have to pay to dispute inaccuracies on your credit report.

Beware Of Credit Repair Scams

Here are some red flags that may indicate you’re dealing with a credit repair scammer:

If you suspect you’re dealing with a credit repair company scam, you can report them to:

Does It Take Long To Repair Your Credit?

How long it takes to repair your credit will depend on how much negative information is on your credit report and how long ago it occurred. Creditors report to credit reporting agencies every month. So, it can take up to 30 days for your credit score to be affected by any action you take.

“If your credit has major issues such as bankruptcy or missed payments, it could take several years to repair your credit,” Tayne says. “On the other hand, high credit utilization or a single late payment on your credit can improve in months if you are able to pay down your cards and make consistent on-time payments.”

Some actions can have a quicker effect on your credit than others. For example, paying down your balances on your credit accounts improves your payment history and reduces the total amount you owe. Payment history makes up 35% of your FICO score, and the total owed makes up 30%. So, paying down balances can have a quicker impact on your credit than simply paying your bills on time.

If you are disputing inaccurate information on your credit report, that investigation can take up to a month to complete. If the credit reporting agency determines that your dispute is valid, the incorrect information will be removed from your credit report, and your credit score will be reflected the next time it is calculated.

FAQ

Here are answers to some common questions about repairing your credit.

The Bottom Line

Bad credit can get in the way of making your next big financial step. Once your credit is good enough to borrow money, it will still cost you more in interest to do so. However, if you make a plan and take specific steps, you can improve your credit score over time.

More From Quicken Loans: