You’ve probably seen ads telling you, “We can erase your bad credit – 100% guaranteed.” Or possibly ones that promise they can: “Create a new credit identity – legally.” Any company that promises a quick fix like this for your credit score is a scam. “Attorneys at the Federal Trade Commission, the nation’s consumer protection agency say they’ve never seen a legitimate credit repair operation making those claims,” says the FTC website.
Repairing your credit if your score has fallen “takes time and there is no quick way to fix a credit score....The best advice for rebuilding credit is to manage it responsibly over time.” That’s the advice you’ll find on FICO’s website. Believe it.
FICO stands for Fair Isaac Corporation. This American corporation introduced the first general purpose FICO score in 1989. Since then, consumers have depended on keeping a good FICO score to be able to get loans and credit cards – especially if they want low rates and generous terms.
Now that it's clear there’s no quick fix to improve anyone's credit score, let’s review the steps for repairing your score the slow and legal way.
STEP 1 – Understand How Your Credit Score Is Determined
You need to understand the five components that affect your credit score before you can start to repair it. Here's what FICO looks at:
- Payment history – 35% of your score – Paying all bills on time will help your improve your score the fastest.
- Amounts owed – 30% of your score – Reducing the amount you owe will also go a long way to improving your credit score.
- Length of credit history – 15% of your score – The longer you have a history of open credit the better. Never close your oldest credit card.
- New credit – 10% of your score – Each time you sign up for a new credit card or loan, your credit score will likely go down for at least a short time.
- Types of credit used – 10% of your score – A good mix of credit types (credit cards, installment loans and long-term loans, such as mortgages) will improve a credit score
STEP 2 – Pay Your Bills on Time
Since 35% of your credit score is based on your bill-paying history, paying bills on time every month is the most important thing you can do to repair your credit score. Two good strategies to improve your bill-paying habits:
- Set up automatic payments using your bank’s online bill-paying system or your creditor’s automatic-payment system. The danger of this strategy is not having enough money in your bank account to cover the automatic payment. So be sure you always have a cushion in your account to cover these automatic payments.
- If you prefer more control, set up a place in your house where you always pay bills. Be sure that all bills end up in that place on the day they arrive in the mail (or print out an email bill if that is how you get your bills). Get an accordion file that enables you to put the bills into the file based on the day you must pay them. Be sure to pay the bills so the check or electronic payment will arrive in the creditor’s hands on time.
If you’re unable to pay all of your bills on time, “cushion the blow to your credit score by defaulting on just one account. There is a component in the FICO score called 'prevalence,'" says John Ulzheimer, president of consumer education at SmartCredit.com. "That means having five collections is worse than having one." He recommends that you “let the account with the highest monthly payment fall behind to free up more money every month to pay your other debt obligations.”
“If you have to choose between debts to pay, skip the credit card bill because it's unsecured and a creditor can't repossess anything. Luckily, credit card delinquencies hurt credit scores less than bigger debts, such as home or auto loans,” says Sarah Davies, senior vice president of analytics, product management and research for VantageScore Solutions.
Step 3 – Get Your Credit Reports
Now that you’re paying your creditors on time, the next step is to get a copy of your credit reports. You can get them for free once every year at annualcreditreport.com. You will need to apply for a free report from each of the credit reporting agencies – Equifax, Experian and Trans Union. Don’t sign up for a credit monitoring service, just get your free copy of each report. When you get to the website, click on the red button that says, “Request your free credit reports.” You can only apply for one company at a time, so you will need to go back to this website three times. The most effective way to do this is to ask for one report every four months – then you'll have the year covered.
Step 4 – Correct Any Errors
Review each report carefully. If you see any errors, correct them with each credit reporting agency individually. Generally, you are seen as guilty until proven innocent. When you write to the credit bureau, be sure to send copies (not the originals) of any proof you may have that there is an error on your credit report.
For more on how to correct your credit information, read “Credit Repair: How to Help Yourself” on FTC’s website and How To Dispute Errors On Your Credit Report. Agencies must investigate any question you send within 30 days.
Step 5 – Reduce Credit Card Usage
After late bill paying, the next largest impact on your credit score is how you use your credit cards, which determines 30% of the score. Ideal usage is considered between 10% and 20% of your available credit limits. For example, if you have $10,000 in available credit lines, then the ideal balances would be between 10% ($1,000) and 20% ($2,000). People with balances in that range tend to be offered the best interest rates.
You need to show you can handle credit wisely, so having occasional balances on your credit cards can be a good thing. Someone who never uses credit likely will not have as good a credit score as someone who shows he or she can use it well.
Step 6 – Monitor Your Progress
You can see how well your credit repair is working by monitoring your credit score. There are numerous ways you can do that for free in addition to getting your free reports. Many credit cards offer you a free monthly credit score as part of their services. If you haven’t already signed up for a free score, check with your credit card companies or banks to see if any of them has a free service.
Join a free credit monitoring website. Be sure there are no hidden monthly charges. Some goods ones include Credit Karma and Credit.Com. Credit Karma even offers a free Credit Score Simulator that gives you the opportunity to determine the likely impact of a credit decision prior to taking on that new credit.
The Bottom Line
Legitimate credit repair is not a quick fix. It takes time and perseverance. Don’t get caught up in a credit repair scam. There are no legal ways to quickly fix your credit score. See Spotting Credit-Repair Scams and Extreme Credit Repair: Why It Doesn't Work.
The best strategy is to be sure to pay all your bills on time. Don’t apply for new credit unless you really have to do so. Too often people sign up for a new credit card to get a one-time discount. You could be paying for that discount for years with a lower credit score and higher interest rates.
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