How to repair your credit in 5 steps
Key takeaways
- A good credit score benefits you in many ways, impacting everything from loan approvals to housing options to job opportunities.
- You can work toward a good credit score by practicing responsible financial habits.
- Even with a bad credit score, you can access certain types of credit that will help you rebuild your score over time.
A good credit score can open doors, affecting from interest rates to job prospects. If your score has taken a hit or isn’t where you want it to be, don’t worry — there are practical ways to boost it over time.
The process may feel overwhelming, especially if it’s new to you. But with some consistency and a few smart strategies, you can take control and improve your score. This step-by-step guide will help you get started.
1. Check your credit score and credit reports
Improving your credit starts with knowing where you stand. By checking your credit report and score, you can see your starting point, set realistic goals and track your progress.
Many online platforms and financial institutions offer options to see your credit report and score for free. To ensure accuracy and protect yourself from identity theft, request credit information only from reputable sources. Some of the available options include:
- AnnualCreditReport.com. Through this website authorized by the federal government, you can request free weekly credit reports from the three credit bureaus: Equifax, Experian and TransUnion.
- Credit bureaus. The major credit bureaus offer free and paid-for credit scores. Read the fine print to make sure you aren’t accidentally signing up for a subscription service you don’t need.
- Nonprofit credit counselors. A credit counselor may be able to provide you with a free credit report and credit score and help you understand the finer details of your reports.
- Your bank or credit card provider. Many lenders and credit card issuers provide free credit score tracking. You may find this information on your monthly account statement or your online dashboard.
2. Review your reports and dispute any errors
Once you have a copy of your credit reports, check them carefully for errors. Mistakes on credit reports are more common than you might think. Fourty-four percent of consumers have at least one error on their credit reports. Some errors can be harmless, like incorrect middle initials, but some can decrease your credit score.
Some common credit report errors to watch out for include:
- Accounts that don’t belong to you
- Closed accounts reported as open or open accounts reported as closed
- Incorrect credit limits or account balances
- Information from someone else’s credit report
- Payments wrongly reported as late or missed
It’s a good idea to check your credit report for errors at least once a year, although you may want to do it more often if you plan to apply for a loan for a major purchase. If you find an error, file a dispute with the reporting bureau immediately. If the error appears on all three credit reports, you’ll need to contact each bureau individually.
What happens after a dispute?
When you file a dispute, the credit bureau has 30 days to review your claim. They’ll contact the company responsible for the possible error to verify the information. Once the review is finished, the bureau must inform you of the results within five business days.
If there’s a change, it may take a few days to appear on your credit report. Be sure to double-check your report to confirm that any updates have been made. If errors remain or reappear, contact the credit bureaus again.
3. Establish positive financial habits to build good credit
Building good financial habits is one of the most effective step for rebuilding your credit in the long run. To do that, you need to know where to focus your efforts.
Your FICO score, which is the credit scoring model lenders use most often, is based on the following factors:
- 35 percent: Payment history
- 30 percent: Amounts owed
- 15 percent: Length of credit history
- 10 percent: New credit
- 10 percent: Credit mix
With those categories in mind, a few healthy financial habits will go a long way. Here are the top things to focus on.
Pay accounts on time
Make payments on time, every time. This is one of the most effective habits for reaching an excellent credit score.
Even a single missed payment can stay on your report for up to seven years. Consider setting up automatic payments for all your accounts to avoid unintentionally missing payment deadlines.
Keep your credit utilization rate low
Your credit utilization is the portion of your total available credit card limits you use. A general guideline is to reduce revolving debt and aim for a credit utilization below 30 percent. This shows potential lenders you can manage debt responsibly.
For example, if you have credit limits totaling $10,000, aim to keep your total monthly statements under $3,000. The lower you keep your credit use, the better it will reflect on your credit score. You can use a credit utilization calculator to see if you’re on track.
Consider keeping paid-off accounts open
You may want to avoid closing any credit accounts you pay off.
Closing an account lowers your available credit, which could raise your credit utilization ratio if you have outstanding balances on other accounts. Also, an account closure could reduce the average age of your credit history. Generally, the older your average credit age, the better you look to lenders.
However, there are times when it makes sense to close a credit account. For example, you may want to close an account if it has an annual fee and you no longer use it. If keeping an account open tempts you to spend more than you can afford, consider closing it to avoid taking on more debt.
Don’t take out credit you don’t need
Each credit application triggers a hard credit check, potentially lowering your score by up to five points and reducing your average account age. Opening a lot of new accounts in a short amount of time can be a red flag that makes lenders think you’re desperate to borrow money. To build credit good credit, only apply for credit when truly necessary.
4. Take strategic steps to establish new credit
Building credit can feel challenging, especially if you’re starting with a low score or no credit history. While your current score may give you fewer options than someone with an excellent score, it doesn’t mean you’re out of luck. There are some steps you can take to help get yourself back on track.
Open a new secured credit card
Secured credit cards may be a good option for people with little to no credit history or those looking to rebuild their credit. These cards require a cash deposit up front, which typically sets your credit limit. Once you’re approved, you can use your secured card just like a regular credit card and build your credit by consistently making on-time payments.
Become an authorized user on someone else’s credit card
Being an authorized user means you’ve been added to another person’s credit card account. You can make purchases with the card but aren’t legally responsible for paying the bill. The card owner’s positive credit history and responsible credit usage could help raise your credit score.
At the same time, any negative activity on your part could damage the other person’s credit, so discuss how you’ll establish good habits or set spending limits. It’s also possible for them to add you as an authorized user without giving you the card or account access.
Open an account with a cosigner
A cosigner is a person with good credit who agrees to be legally responsible for a loan if the primary borrower doesn’t make payments as agreed. Their good credit may make it easier for you to qualify for a loan since the lender knows it has a backup source of repayment.
A cosigner shares full responsibility for the loan, which could impact their ability to qualify for other loans. So, be certain you can comfortably manage any loans you take on.
Apply for a credit-builder loan
If you have no credit history or a low credit score, a credit-builder loan may help you build a track record of responsible financial behavior without relying on a credit card. Unlike traditional loans, you don’t receive the money up front. Instead, the lender places the amount you “borrow” in a savings account or certificate of deposit (CD).
You make fixed monthly payments until the loan is fully paid off. Once you’ve made all the payments, you get access to the funds. This setup lets you build a track record of on-time payments, which can improve your credit score over time. However, because you only receive the funds at the end, it’s not a good option if you need quick access to cash.
5. Seek out credit counseling to discuss your options
If improving your credit score feels overwhelming, consider working with a reputable credit repair company or credit counseling agency. They offer services to help you take control of your finances, from checking your credit score to offering budgeting advice.
Credit counseling agencies may recommend a debt management plan (DMP). Under a DMP, you make regular payments to a credit counseling agency, which pays your creditors on your behalf. The agency may negotiate with creditors to secure lower interest rates, waive fees or extend repayment terms, making it easier for you to meet your financial obligations.
To find a reputable credit counseling agency, you can visit the National Foundation for Credit Counseling (NFCC), a nonprofit network of financial counselors. You can also refer to the Department of Justice to find approved credit counseling agencies near you.
The bottom line
Remember, a low credit score isn’t permanent. There are steps you can take to improve it over time. Start by reviewing your credit reports and addressing any errors, then focus on developing healthy financial habits and consider options for building new credit. If you need extra guidance, a credit counselor may provide helpful support along the way.
