Credit repair is the process of fixing your credit score after it takes a small or big hit. You may think you have to use a credit repair company to significantly fix your credit or seek advice from a financial expert, but that is not the case! There are many DIY credit repair solutions available that anyone can use! Continue reading for the most approachable ways to pursue the credit repair process.
Understanding How Your Credit Score Works
Before you try and repair your credit, it will be helpful to understand how credit works. Everything about how you handle your credit accounts will show up on your credit reports. These reports are located with all three credit bureaus (also called credit reporting agencies) as your credit history. Your credit history is what determines your credit scores. Here are the factors of your credit history that make up your score:
Your Payment History
One of the most significant factors impacting your credit is your payment history. This factor looks at all your credit accounts and checks how many payments you have made on time and are late. Payment history is especially useful when trying to rebuild your credit.
Your Debt to Credit Ratio
Your debt to credit ratio can also be called your credit utilization ratio. It measures the amount of debt you have to the amount of available credit. Keeping your ratio under 30% can reflect positively on your credit score.
The Age of Your Credit History
How old your credit accounts are will also impact your credit score. Keeping credit accounts open even after they are paid off will help your score.
The amount of newer credit you have can also impact your score. Multiple credit checks can hurt your score, so avoid them if possible.
Your Credit Mix
Your credit mix is determined by the different kinds of credit accounts you have. Having a good mix can help your credit score.
Now that you know a little about the factors that make up your credit score, it will be helpful to understand the different credit score ranges. The most popular credit scoring model is a FICO score used by the three major credit bureaus. Here is the scoring range for a FICO credit score:
- Poor — 300 to 559
- Fair — 580 to 669
- Good — 670 to 739
- Great — 740 to 799
- Excellent — 800 to 850
With this information in hand, you’ll be able to track your progress and move forward to try and repair your credit score. Here are some strategies that will work well!
Prioritize Making On-time Payments
One of the best ways to improve or build a credit score is to establish a positive payment history, with timely payments. You can do this by ensuring your bills are paid on time. This is especially important for your credit accounts. Although a few late payments may not seem like a big deal, they can significantly harm your credit score! If you don’t have any credit cards or loans, then you get things like your utility bills or rent payments reported. There are also credit builder loans and prepaid credit cards you can look into to build your credit.
Keep Your Credit Card Balances Low
Another thing you can do when trying DIY credit repair is to refrain from using your credit cards. Credit cards are a form of revolving credit, meaning that adding to them will increase debt and decrease the amount of available credit you have. And so, any additional credit card debt can be a double hit to your credit score!
Pay Off Your Debt
A lot of debt can lead to a poor credit score, while paying off debt can help you repair it. Whether you have a lot of debt or very little, there are debt elimination options you can pursue. You can consider debt consolidation loans, debt repayment strategies, or building a budget focusing on debt payoff. You can even consider things like a part-time side gig, or selling some stuff for extra income towards debt repayment.
Set Yourself Up For Different Credit Types
Having a diverse credit mix is essential when trying to repair bad credit. When you are just starting out, you may only have access to smaller loan amounts and credit cards. As you build a more extensive credit history, you may receive offers for car loans, large personal loans, and a mortgage. Adding variety to your credit mix can help you look more responsible to potential lenders and can help increase your credit score. However, not all loan types are worth adding to your credit portfolio. Predatory loans like a pay day loan online or a car title loan should be avoided as they can lead to a cycle of debt.
Keep Your Revolving Credit Accounts Open!
Even if you have paid back your credit card debt, lines of credit, or other revolving credit accounts, make sure to keep those accounts open! Why is this important? Closing a revolving account that is paid off will decrease the amount of available credit you have—which will skew your credit utilization ratio.
Avoid Cosigning or Co-borrowing on a Loan
You may come across a point in your life where you will be asked to either be a cosigner or co-borrower for a loan. The main difference between a co-borrower and a cosigner is that a co-borrower will be responsible for making the monthly payments on the loan. In contrast, a cosigner will only be responsible for the loan amount if the primary borrower cannot repay it. When trying to repair your credit, avoid signing onto a loan for another person or with another person, as their actions can impact your credit score. Any late payments or default accounts will reflect poorly on your credit scores.
Check Your Credit Reports Often!
Checking your credit reports often can help with credit repair. You can easily learn how to read a credit report, if you haven’t checked one before.
As mentioned above, all three major credit bureaus offer a credit report—and you are entitled to a free credit report annually from each. Why is checking your credit reports important? Sometimes mistakes can happen, hurting your credit score at no fault of your own. The most common errors to look for:
- Inaccurate debt balances
- Credit accounts/debt that does not belong to you.
- Closed accounts were reported as open.
- False late or delinquent accounts.
- Incorrect dates.
- Credit accounts with the wrong credit limits.
You can contact the corresponding credit bureau if you see any mistakes or inconsistencies. Once those errors are corrected, you may see a boost in your credit score!
DIY credit repair is possible for the average person! Strategies like making payments on time, paying off debt, being strategic with revolving credit like credit cards, building a diverse credit mix, and checking your credit report can all help you repair credit on your own!
Consumer Financial Protection Bureau