It’s important to note that repairing bad credit is more like running a marathon than a sprint. There are no quick fixes and it will take some time to get there. It isn’t for the faint of heart. There are many that would rather leave it to the credit repair professionals. If you have the time and the focus you are capable of repairing your own credit. While there are strategies to get some quick successes, the bottom line is that your credit score will improve just by removing errors and managing it responsibly over time. The Federal Trade Commission (FTC) conducted a study that estimated that 42 million credit reports have errors. This credit repair guide will help you to recover from credit bureau issues as well as those that are self-inflicted.

STEP 1 – Get Your Free Credit Reports

Get Your Free Credit Reports – Credit score repair begins with your credit report. You don’t sign up for a credit monitoring service and pay a monthly fee just to get a copy of each report. If you haven’t already done it, request a free copy of your credit reports and check them for errors. Your credit reports contains the data used to calculate your score and they may contain errors. In particular, check to make sure that there are no late payments incorrectly listed for any of your accounts and that the amounts owed for each of your open accounts is correct. If you find errors on any of your reports, dispute them with the credit bureau.

STEP 2 – 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 – Delinquent payments, even if they are only a few days late, and collections can have a strong negative impact on your credit score.
  • Credit Accounts – 30% of your score – Reducing your credit utilization can go a long way towards increasing your credit score.
  • Length of Credit History – 15% of your score – New accounts lower your average account age. The longer you have a history of open credit the better. Never close your oldest credit card.
  • Credit Applications – 10% of your score – Each time you apply for a new credit card or have a loan inquiry on your credit, your credit score may likely go down for at least a short time.
  • Credit Usage – 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.

What Makes up a Credit Score

Step 3 – Dispute and Fix Errors on All Credit Reports

Carefully review your credit report from each of the bureaus. If you see any errors, you must correct them with each credit reporting agency separately. Anyone accessing your credit sees only what is reported on the credit report which is your “official” credit record. It is important to dispute any errors quickly! When you write to the credit bureau, be sure to send copies 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 “Disputing Errors on Credit Reports” on the FTC’s website or “How to Help Yourself” to learn about your rights. Agencies must investigate any question you send within 30 days.

When you apply for credit, just being a single point below the lenders threshold can remove you from a better rate, a lower down payment, or even from getting approved at all. Experts say a majority of consumers aren’t aware of credit report errors until it’s too late. Get in the habit of getting and reviewing your credit reports regularly.

Step 4 – Pay All of Your Bills on Time

Now that you have reviewed your reports and all errors are in the dispute process it’s time to tackle the next big area. Your bill paying history makes up 35% of your credit score. It sounds like a no brainer but start paying your bills on time every month. Here are two methods to help you improve your bill paying habits.

  1. Set up Automatic Payments –You should consider enrolling in automatic payments through your credit card and loan providers to have payments automatically debited from your bank account, however this only makes the minimum payment on your credit cards and does not help instill a sense of money management. Some banks offer payment reminders through their online banking portals that can send you an email or text message reminding you when a payment is due.
  1. Organize a Bill Paying System – Get an accordion file folder with a slot for each day of the month. Keep it in a place where it will be convenient to place the bill in the folder as soon as it arrives in the mail or you when you are notified electronically. Make sure you pay the bills in the folder in time so that the creditor receives them on time, every time, and every month.

If you are struggling to pay all of your bills each month then choose one bill not to pay and pay all the rest. While it means a ding to your credit as you try to turn it around, the bureaus penalize you less for being late on only one account than they do for being late on five. A credit card is a better choice to delay payment on because it is unsecured (nothing can be repossessed) and the delinquency typically hurts credit scores less than with larger debts.

Step 5 – Lower Your Credit Card Usage

Next, after bill paying history, the biggest impact on your credit score is called credit utilization. This basically means how you use your credit cards. This makes up 30% of your credit score. Ideal usage is considered between 10% and 30% of your available credit limits. What this means is that For example, if you have three cards with $1,000 in available credit lines each, then the ideal balances would be between $300 (10%) and $900 (30%). People with balances in that range tend to be offered the best interest rates.

If you have the income to support it and you just don’t have the ability to pay down your balance, then another option is to request a credit increase from the most likely credit card company to authorize it. Let’s use the above example but now you have a $1,200 balance which equates to 40% credit utilization. By increasing your available credit line to $4,000 your new utilization is 30%. This is not recommended, but is an option to when getting working to improve your score quickly. (Warning: Don’t increase your spending to match the new limit!)

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 can use it well.

Step 6 – Implement and Maintain Good Credit Management Practices

After completing the steps above, following good credit advice, maintaining good credit practices, and being smart about using credit will keep you moving in the right direction. Incremental improvement will continue as long as you stay focused.

Here are some tips that will help keep you on track:

  • If you have just started recently to actively manage your credit, don’t begin by opening a lot of new accounts quickly. New accounts will lower your average account age, which will have a disproportionately negative effect on your scores if you don’t have a lot of other credit information to balance it out. In addition, rapidly adding new accounts can appear risky if you are a new credit user.
  • Do your rate shopping for a given loan within a short period of time. The FICO Score model distinguish between a search for a single loan and a search for many new credit lines. It does this in part by looking at the length of time over which the inquiries occur.
  • Only apply for and open credit accounts as needed. Don’t open accounts just to have a better credit mix. It will add to the temptation to use them and most likely won’t raise your credit score.
  • Have credit cards, but manage them responsibly. Generally speaking, having credit cards and installment loans will rebuild your credit scores. It is important to make timely payments every time a payment is due. Lenders tend to view someone with no credit as a higher risk than someone who has credit cards and managed them responsibly.
  • Remember that closing an account doesn’t make it go away. In fact, it may hurt you score by reducing the average length of credit. A closed account will still show up on your credit report, and may be considered by a score.
Step 7 – Watch Your Progress

If you have done everything, now is the time watch for the benefits of your labor. You can see how well your credit repair work is working by monitoring your credit score. There are a number of ways you can do that for free in addition to getting your free reports. Many credit cards now offer you access to a free monthly credit score as part of their services and benefits. If you haven’t already signed up for a free score or have access to one through one of your current credit cards, check with your other credit card companies or banks to see if one of them has a free service.

If the process just seems to time consuming, confusing, or both, then it may be time to call the professionals. There are many companies that can help you with credit repair. Depending on your situation, their services can be worth every penny!