Poor credit can impact all aspects of your life -- everything from renting a home, getting a job, your car insurance, and of course, your ability to get credit at good interest rates. You may see credit repair advertisements, but you can repair your credit on your own by following the following five steps.
- Correct inaccuracies. Recent studies show that up to 25% of all credit reports contain significant errors. To detect and correct these inaccuracies, get a free copy of your credit report at annualcreditreport.com and carefully review your records. Dispute any inaccuracies by notifying the credit bureau and following their process -- they have 30 days to investigate and respond to your dispute.
- Pay on time. By far, the biggest factor impacting your credit is your payment history. Take immediate action by bringing active delinquent accounts current as quickly as you can and staying current. If you have delinquent accounts, your score will show improvement within 6 months.
- Close toxic accounts. Some types of accounts like in-store financing and rent-to-own will harm your credit even if you're current. That's because credit models associate these types of accounts with people more likely to default on their loans. Pay off these accounts and close them as soon as possible.
- Correct collection accounts. Accounts in collections will impact your credit for seven year from the date they first go into collections. However, any payment made on these accounts restarts the timing. If your collection accounts are several years old, you may be better letting them “age off” your account. If the account has gone to a collection agency, it may be possible to negotiate a settlement for 25-50% of the original balance, since collection agencies often buy collection debt for as little as 6-10% of the balance. As part of your negotiation, insist that they remove the account from your credit report. This is referred to as “pay for delete” and will remove this negative action from your file. If your debt holder is unwilling to do this, do not reaffirm your debt or make payment -- it will eventually "age off" your credit report.
- Improve credit line utilization. Credit scoring models penalize you for having high total utilization (you total credit card balances divided by your total credit lines on all accounts) and high utilization on any account. Pay down high-utilization accounts and then reduce your total credit utilization by paying equally on all accounts. Ideally, your credit utilization should be less than 20%.
By taking the actions outline above, you can start rebuilding your credit and see improvements in less than six months.