Credit Repair: How to Fix Bad Credit

A credit score is a single number that gives a health grade to your credit history. It is provided by credit bureaus, Equifax and TransUnion, and it is calculated using the following factors:

• Your loan payment history,
• Your available credit and your current loan amount,
• Length of your credit history,
• Your credit mix,
• Number of inquiries into your credit file.

A credit score ranges from 300 to 900 points, and generally may not match between the credit bureaus. The credit score ranges are broken down to categorize the riskiness of borrowers, but many lenders also consider the exact score, as well as the details of the credit history, to assess the borrower's risk profile.

Equifax and TransUnion use different credit score metrics, which may result in different credit scores. The following table provides the breakdown of the scores into risk categories.

A credit history is a comprehensive file with all reported credit records. These records include all of your credit cards and loan history, as well as the payment history for all loan products. It also provides information about any public records you may have, including bankruptcies, consolidated debts, collections, debt recoveries, and judgments. Some records may not show if the lender does not report the loan details. This is an important caveat because an incomplete credit history may significantly affect your credit.

A score of 600 and below is considered a bad credit score. This credit score significantly restricts your ability to obtain any type of credit, but you may still qualify for bad credit mortgages, car loans for bad credit, and personal loans for bad credit. These loans offer lower principal and have higher interest rates than regular loans. When you compare a bad credit loan and a regular credit loan, you might realize that you overpay thousands of dollars with a bad credit score.

It is easier to damage your credit score than to rebuild it. A few missed payments or a single significant loan failure, such as default, may cause your credit score to decline to a poor status, even if it was previously excellent. There are a few factors that may decrease your credit:

• Long-Lasting: These should be avoided because they can harm your credit for an extended period, and there is no quick fix. Wait until they do not have as much of a detrimental effect on your credit. In some cases, these factors can significantly impact your credit score for years.
• Short-Lived: These may negatively impact your credit for a short time, but generally, they should have a minimal impact and should not linger for years.
• Reversible: Any mistakes or fraud can be fixed relatively easily. You can contact the credit bureau to correct the mistakes or report fraud. If their investigation proves you are not at fault, the negative factors will be removed from your file.

A good credit score increases your chances of loan approval, higher loan limits, and lower interest rates. A poor credit score will restrict you from getting loans, while a better credit score will not only allow you to borrow more, but it will also let you do it cheaper. A credit score may also be analyzed by landlords and other service providers that require periodic payments. A good credit score signals reliability to lenders, landlords, service providers, and even employers.

A higher credit score allows you to enjoy the following benefits:

• Access to credit cards with higher limits, lower interest rates, and better perks.
• Access to better mortgages with lower interest rates and possibly higher limits.
• Better insurance rates in some cases.
• Lower deposit requirements for loans and recurring services.
• Better loan terms with higher credit limits for other loans.

Repairing credit is a relatively straightforward task, but it may take some time to achieve an excellent score. Regardless of your current credit score, following the rules below will help you maintain a good credit score and repair your credit if it has been damaged.

First, assess your current credit situation by checking your credit report. This means you should be aware of your credit score, the types of loans you have, and the specific factors that may impact your credit score. You can request a free credit report once a year from Equifax or TransUnion, or monitor your score monthly through free online tools.

Once you get your credit report, you should analyze it carefully and check whether all credit cards, loans and lines of credit are listed. You should also check if there are any public records, including bankruptcies, consolidated debts, collections, debt recoveries, or judgments. You can go even further and check credit card and loan payments to see if there have been any late or missed payments.

Once you review your credit report, you should understand what factors may lower your credit score. These may include missed or late payments, bankruptcies, fraud, or even a simple lack of credit history. Identifying weak areas will enable you to strategize your credit repair journey effectively.

If you see any missing loan or credit card accounts on your credit report, you should call your loan or credit card provider to ask them to report your credit information to the credit bureau. This will ensure that your credit report has full and up-to-date information on all of your accounts. Having a complete report also helps lenders better evaluate your creditworthiness. This may also increase your credit history age if you have old, unreported credit accounts. In rare cases, it may lower your credit score if your unreported account has had missed payments or has a high balance.

A great way to maintain on-time payments is to set up reminders or automatic payments for your credit card bills and loans. This way, you will not have to worry about missing payments, which can easily reduce your credit score. Paying your loan and credit card bills electronically as late as a couple days before the grace period ends will help you stay on top of your payments and give the lender sufficient time to process your payment. If you pay your bills physically, such as by cheque, you must account for delivery and processing time. It may be better to do it 10 or more days before the due date on your loan account.

If you set up automatic payments from your bank account, ensure that you have sufficient funds in your account to cover the bills. If your bank does not have sufficient funds to cover the payment, the transaction may be reversed, resulting in hefty NSF fees and a record of missed payment. An overdraft protection or an overdraft line of credit connected to your debit account may be useful for such cases.

If you do not have any credit history or any loan instruments, and your credit score is low, you may not be eligible for loans or credit cards. In this case, building credit may be tricky. You may need to consider getting a credit card for bad credit, a secured loan, or even report your rent to a credit bureau.

If your credit score is low due to high credit utilization or excessive inquiries, consider how you manage your debt. First, analyze why you have too many inquiries. If you have a high balance on your loans, you should check which balances have the highest interest rates. These are usually credit cards. Start paying off your debts by maximizing your payments to the account with the highest interest rate. You should also ensure that you make a minimum payment to your accounts with lower interest rates. Over time, if your expenses and interest on loans do not exceed your income, you should improve your credit score and general credit situation.

If your income is less than your spending and interest charges, you must consider either a lifestyle adjustment or increasing your income. If your income does not cover your expenses, then a loan management system will not work. The only sustainable solution is to either spend less or start earning more until your income exceeds your expenses.

If you have old credit cards that you don’t use, it may be better to keep them open but locked rather than closing them. Your credit history age is calculated by averaging all your accounts. An old account can help you increase the credit history age and improve your score. When you are trying to rebuild your credit, these old accounts may come in handy by increasing your points simply because you had a product for a while. If your credit card has a monthly or annual fee, then it may be worth closing the account and forgoing the benefits, as the periodic expense is not worth the benefit.