Got bad credit? You’re not alone. According to a breakdown of credit bureau Experian’s 2015 VantageScore 3.0 data, close to one-third of Americans have a credit score lower than 601 — and, yeah, that’s not so hot.
Finding out you’re in that lowest credit echelon often comes at the worst time. You’ve just applied for a credit card, a car loan, a mortgage or even an apartment, and you were rejected. Along with the dream-crushing news comes a letter that spells out the reasons you weren’t approved. It may say things like “Too few installment accounts” or “No recent revolving account activity.” And even though they’ve given you the explanation as to why they deemed your credit not good enough to be approved, you’re still lost on how to actually fix your credit. But we’re here to help.
First Step: Check Your Credit
The first thing you need to do is get your credit reports and credit scores. You can get free copies of your credit reports from the three main credit bureaus — Experian, Equifax and TransUnion — once a year under the Fair Credit Reporting Act. (Ready to get yours? You can get more information on how to get your free annual credit reports here.) You should get your credit reports from each of the major credit reporting agencies because each report may contain different data that could impact your credit scores. You’ll rarely know ahead of time which credit report is being pulled by a lender, so it’s important to make sure all of them are accurate and you’ve addressed any and all issues. You can check your credit scores for free on Credit.com every 30 days to track your progress as you fix any credit mistakes.
What Will I See on These Reports?
OK, now you have the reports. But what does all this information really mean? You’ll see basic details about yourself on there — your name, birthday, address, etc. — and it’s important to review this and make sure it’s all accurate. (Note: Past addresses may also be listed, which is OK.)
You’ll also see any financial legal issues you may have, like a bankruptcy, lien, judgment, or any wage garnishment. (If one of these is what is bringing your scores down, take comfort in knowing that these negative items do eventually age off, but more on that in a minute.)
Beyond that is the creditor information, which makes up the majority of your reports. This includes different accounts you have (loans, credit cards, etc.), the status of these accounts (open/closed, in collections), balances, credit limits, and payment details. They may also include dates of missed payments or dates the accounts were sent to collections, if these details are applicable.
From the financial details mentioned above, your scores are formed. Credit scores are broken into five major categories:
- Payment History (35% of your scores) — Your history of repaying account debts
- Credit Utilization (30%) — How much debt you’re carrying in relation to your credit limit
- Length of Credit History (15%) — How long you’ve had active credit accounts
- Types of Credit (10%) — Considers the variety of accounts you have
- Credit Inquiries (10%) — Number of inquiries into your credit profile
Now that you understand what these reports cover, and the makeup of your credit scores, you can better understand remedying any problems you’ve discovered.
You Can’t Fix Bad Credit in 30 Days
We get it — You’ve found the problems, whether they’re errors or areas you need to focus on, and want results, fast. But these revisions to your reports can’t happen overnight. Some credit score mistakes can be resolved quicker than others.
As you may be able to tell just from scanning what we just went over, some credit score categories are more easily “fixed” than others. For instance, you won’t be able to lengthen your credit history right away. However, you may be able to fix your credit utilization — the amount of debt you have relative to your credit limits, and the second most important factor in your credit scores. It’s best to keep your credit utilization below 30% (10% is ideal) to show creditors that you can manage your available credit responsibly without maxing out your cards. If you went a little overboard recently and went over that 30% mark, you can pretty quickly undo any small drop you may have noticed in your scores by paying off those balances and getting your percentage back less than 30%.
But that is more the exception than the rule. Some credit mistakes will impact your score for years. It’s tough news to hear, especially if you were really counting on that mortgage approval to finance your dream home. That’s why checking your credit on a regular basis is important. If you spot a mistake and can get it fixed before you apply, you can avoid getting that “Dear John” letter from a lender.
So How Long Does It Take to Repair My Credit?
If you have accurate, negative information on your credit reports, it can take a while for it to age off. Here’s how long negative marks can remain on your credit report.
- Late Payments: 7 years from the late payment date
- Foreclosures: 7 years
- Collection Accounts: 7 years and 180 days from the date of delinquency on the original debt
- Short Sales: 7 years
- Bankruptcies: 10 years from the filing date; 7 years for Chapter 13 cases
- Repossessions: 7 years
- Judgments: If the judgment has been paid, 7 years. If unpaid, potentially longer
- Tax Liens: 7 years after they are paid
- Charge-Offs: 7 years from the date the account was charged off
However, if you have inaccurate, negative information on your credit reports, you can see some big changes relatively quickly to your credit scores as you remedy them. Credit reporting agencies have to respond to disputes of inaccurate information within 30 days (some disputes can take 45 days), which is much shorter than the years-long wait you’ll face with accurate derogatory information. If the credit reporting agency sides with you, they must remove the mistake immediately by law. In a 2012 Federal Trade Commission study on credit report accuracy, 79% of people who disputed an error on their credit reports had that error removed.
Steps to Rebuild Your Credit
OK, it’s time to get started on improving your credit. Your path to better credit can be vary significantly depending on what your core credit score problems are. Here are a few tips for repairing your credit.
1. Pinpoint Your Credit Score Killers
If you have one of those letters we mentioned earlier that details your credit problems, you already have some idea of what’s holding you back (even if you don’t understand some of the lingo being used).
Even though it may seem complex, as we mentioned, your credit score is based on five core factors: payment history, credit utilization, age of credit accounts, mix of credit accounts and history of applying for credit. Each is not equally important.
Your payment history is the most important factor, accounting for 35% of most scores, which is why even just one late payment can drop your score significantly.
Your credit utilization is the second biggest factor, accounting for 30% of most scores, and it encompasses the amount of revolving credit (i.e. credit cards, home equity lines of credit) you’re using compared to the limits on those accounts.
The age of your credit accounts is another important factor, accounting for roughly 15% of most credit scores. It’s calculated by looking at both the age of your oldest account and the average age of all your accounts. If this factor is hurting your scores, there’s not much that can be done to “fix” it except not closing accounts.
The mix of your credit accounts, which accounts for 10% of most credit scores, looks at how you handle different types of credit. There are two main types of credit — installment accounts (i.e. mortgages, car loans, student loans) and revolving accounts (i.e. credit cards, lines of credit). Creditors want to see that you can handle both kinds of credit responsibly. If you only have credit cards in your past, a car loan or a mortgage can help improve your credit score, but it’s rarely a good idea to take out a loan just to build credit.
The last major factor, your history of applying for credit, which accounts for 10% of most credit scores, may be holding you back if you applied for a lot of credit accounts recently. This factor also takes some time to correct, but any hard inquiries into your credit only ding your scores slightly, and as they get older will stop impacting you as much. A year is generally when they stop hurting your credit scores.
Now you know what’s hurting your credit scores. What do you do first? Since one of the fastest ways to see some credit score improvement is fixing any errors on your credit report, that’s your next step.
2. Clean Up Your Credit Report
If you have mistakes on your credit, start the dispute process as soon as possible. As we explained earlier, credit reporting agencies have 30 days to respond to disputes (there are a few exceptions that can extend that to 45 days). But how do you actually start the process?
Here are a few quick tips for determining how many credit repair letters you’ll need to write or file online.
- You need to dispute each mistake with each bureau. Just because the same mistake appears on all three credit reports doesn’t mean disputing it with one of the bureaus will fix it with the others. One credit bureau does not fix the mistake with the other bureaus.
- You can’t dispute everything on one credit report with just one letter. It’s not uncommon to find multiple errors on your credit report. You’ll need to dispute each account separately. However, if you see multiple mistakes on the same account, you can group all of those mistakes into one dispute.
- You don’t have to do it yourself. You can dispute credit report errors without any experts helping you, but for some people, the process is too confusing, too tedious or too tiresome and they just want to hit the “easy” button on it. You can hire a credit repair company or law firm to represent you in these matters for a fee. A good credit repair company will never promise you a “300-point jump in your scores!” — in fact, it’s illegal for them to do so. They’ll be upfront about what they can do on your behalf and will take payment after they’ve delivered services.
For more help, consider this sample credit repair letter.
3. Start Some Positive Credit History
You may have been denied one kind of credit, but that doesn’t mean you’re shut out entirely. If your payment history, credit utilization or mix of accounts are hurting your scores, opening new credit may be able to help you rebuild faster.
There are credit cards specifically designed to help people who’ve suffered credit problems fix their credit — they’re called secured credit cards. These cards require a deposit that generally will serve as your credit limit for the account. If you don’t pay your bills, the card company can then withdraw money from that deposit. If you open one of these cards, it’s important to make on-time payments and keep an eye on that credit utilization number. Just because you have a card with a $1,000 limit doesn’t mean you should charge $800 on it — that can hurt your ratio and hinder your efforts to repair your credit. You can check out our ranking of the best secured credit cards.
Here are a few other quick tips to consider as you work to fix your credit.
- Pay down credit card balances and refrain from making new purchases. In fact, you may want to put your plastic — figuratively or literally — on ice while you wait for your score to improve.
- If you’re worried about taking out a credit card, consider a credit builder loan with a bank or financial institution instead.
- Refrain from closing old credit card accounts once you have them under control as this can affect your credit utilization and make it harder to build a solid credit history in the long-term.
- When you’re ready to shop around for new credit, like a mortgage or auto loan, rate shop during a 30- to 45-day window. Most credit scoring models will group inquiries by type in that timeframe.
- Consider paying any outstanding collection accounts if you can. Some newer credit scoring models will ignore paid collections entirely.
And, of course, don’t give up! If you build good habits over time, you’ll fix your credit and maintain good scores in the long-term.
This article has been updated. It was originally published January 29, 2016.