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Repairing Your Credit Score: A Step-By-Step Guide

7 minute read August 29, 2022

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A low credit score can hold you back from reaching meaningful milestones in your life, like buying a car or home. Getting approval for an auto loan or mortgage relies heavily on your credit score and history. This means a lender’s approval might be hard to come by if your financial past is less than stellar.

Thankfully, repairing and building your credit is typically a straightforward process, although it can take some time to see improvements. Let’s discuss the steps you can take and why you should start your credit repair journey as soon as possible.

Why Do You Need To Fix Your Bad Credit?

While most consumers understand that you need a minimum credit score to qualify for some types of financing, they might not realize how much their credit history affects the cost of borrowing money.

Lenders charge borrowers an interest rate based on borrowers’ perceived risk. If a lender checks your credit history and sees missed or late payments, bankruptcy or foreclosure, they’ll likely charge you a high interest rate. The higher your rate, the more interest you’ll pay over the life of the loan.

By taking the opportunity to increase your credit score now, you could qualify for a lower interest rate and potentially save thousands of dollars the next time you borrow money.

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How To Fix Your Credit Score In 6 Steps

According to FICO®, a decent credit score is between 580 and 669, and a poor score is 579 and below. Even though you could probably qualify for some financial products with an average score, you might be limited on the loan’s rates and terms. If your credit score is poor or just OK, it would be wise to consider making some changes.

With the following half dozen steps, you could steadily increase your score and improve your credit history so you can eventually be approved for a mortgage or another type of loan. 

1. Check Your Credit Report

Before you can start repairing your credit, you need to understand your credit score and what’s on your credit report. Without knowing either, you’ll have difficulty figuring out what needs fixing.

The three credit bureaus – ExperianTM, Equifax® and TransUnion® – all have reports based on your past activity. For a complete view of your payment history, you should get a copy of your credit report from all three agencies. You may notice that some lenders or credit card issuers don’t show up on all your reports. That’s because some institutions may only send information to certain bureaus. 

Assessing your report is also necessary for checking your credit, as your history is used to calculate your three-digit score. Several credit reporting agencies offer free quarterly or annual credit report checks so you won’t have to pay to see your rating. This type of inquiry also shouldn’t affect your score since it’s considered a “soft credit check.”

2. Find And Dispute Errors

In 2013, the Federal Trade Commission (FTC) ran a study that found one in five consumers had an error on at least one of their credit reports. This issue may not sound like a big deal, but incorrect information on a credit report can lower your score and keep you from getting approved for a loan. Once you have copies of all three reports, you can start checking your reports for errors.

You could find typos or inaccurate information anywhere in a report’s sections. To locate potential issues, you should check:

  • Personal information: Make sure your name, address and phone number are correctly spelled and don’t include typos.
  • Account information: Check that all account numbers are listed correctly and that they actually belong to you and not to an identity thief or someone with the same name.
  • Account statuses: Ensure that all closed accounts are marked as closed, and that open accounts are still noted as open.
  • Account balances: Double check that all account balances reflect an accurate amount and are up to date.

The Consumer Financial Protection Bureau recommends disputing any errors you find with the credit bureau that provided the report in question. However, if the error shows up on multiple reports, it might be easier to contact the “furnisher,” which is the bank or credit card issuer that provided the information.

The credit bureau or information furnisher may request documentation of the error. If so, you can send them copies of your report, account statements and payment receipts, along with a letter explaining the error and noting how the information should be corrected.

3. Set Up Autopay Or Reminders

The biggest factor in determining your credit score is your payment history. In fact, 35% of your score is based on it. That means if you have late or missed payments, your credit is probably feeling the effects.

Fortunately, many utility providers, lenders and credit card companies allow their customers to use automatic payments. If you don’t have autopay set up for your accounts, now is the time to do so. Taking advantage of this feature will allow you to make on-time payments, which can significantly improve your credit score.

If you have bills that don’t allow for automatic payments, you can set up calendar reminders instead to ensure you don’t forget them. It’s also an excellent idea to make a monthly habit of checking your bank account and ensuring that all payments have been processed without issue.

4. Pay Off Debt

Along with making timely payments, paying off debt can increase your credit score while improving your history. A credit score indicates your creditworthiness, which is essential to lenders who want to be confident you’ll pay off the loan they give you. Paying any outstanding debt you have shows lenders that you can uphold a loan’s terms.

Removing outstanding credit card balances also lowers your utilization. A credit utilization ratio is the percentage of your credit limit that you use. If you’ve used too much of your available credit, your utilization ratio will be high and could prevent lenders from approving you for a loan.

Another qualifier that lenders consider is your debt-to-income ratio (DTI). This percentage is calculated by dividing your gross monthly income by your total debt. If a lender deems your DTI too high, they won’t approve your loan application. To lower your DTI, you can reduce your debt and free up more of your monthly income.

5. Maintain Older Accounts

As you pay off your debt, you might close old credit cards to avoid racking up more charges. But this could harm your score more than if you had left the account open. That’s because the length of your credit history makes up 15% of your score. So if you suddenly shutter an old account, your history will get shortened.

Keep in mind: Since bureaus don’t include past accounts when calculating your credit score, you won’t see the effects of on-time payments and a low utilization rate on your score after the card is closed. Closing a card will also lower the average age of accounts, further hurting your credit.

However, sometimes you might need to close a credit card if, for instance, you’re going through a divorce or the late fees are too high. You may be able to reduce the risk of lowering your score by waiting to close your account after a period of inactivity. 

6. Increase Credit Limits

Another change you can make to repair your credit score is to expand the limit on your credit cards. As mentioned, credit utilization is an important factor in your score, so if you can increase your available credit, you can lower your ratio.

Contact your card issuer and ask for a higher credit limit. As long as you’re in good standing with your provider, they’ll probably raise your limit without issue. They might ask to verify your income and employment status to ensure you can afford the increase.

Once your limit has changed, it might take a little while to see the difference in your credit report. But after your account is updated, your utilization rate should drop and hopefully increase your score.

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Additional Credit Repair Advice

The credit repair process isn’t a one-size-fits-all solution, and it may take several rounds of checking your reports, fixing errors and paying off debt to get a good credit score. Other steps you can take along with those above to help improve your efforts are as follows:

  • Avoid opening multiple accounts within a short timeframe. Just like closing a card can shorten the length of your history, opening new lines of credit can reduce the average age of accounts and create a dip in your score.
  • Diversify your credit mix. Lenders are more likely to approve a borrower with a proven track record that includes various credit types. If you need to open a new account, try using a new form of credit.
  • Be cautious of credit repair companies. Businesses that promise to repair your credit usually only find and dispute errors on your behalf. While this can benefit your score, it’s a relatively simple process you can perform without paying a fee.
  • Consider using a credit counseling service. If you want help with paying off debt and improving your score, you can look for a non-profit organization or agency that can assign a credit counselor to advise you.
  • Wait for negative information to come off your report. Before applying for a large loan like a mortgage, it’s best to wait for negative items like bankruptcies, foreclosures and collections to fall off your credit report. This precaution can help you land a better interest rate.

What Is The Fastest Way To Fix My Credit?

Repairing your credit score won’t happen overnight. Instead, it will likely take weeks or months to see your score increase by a significant amount. However, you can take a few steps to impact your credit in a short period of time.

If you don’t have a credit card, you may want to apply for one to help establish a credit history. Lenders not only decline borrowers for having poor credit, but they also turn away consumers with no credit. You might consider getting a student, secured or store credit card since these usually have looser requirements.

Paying off debt can improve your score as well and reduce your debt-to-income ratio. By using a personal loan you can consolidate multiple debts while reducing your interest rate. A secured loan could also work, although lenders require collateral for this type of financing. Make sure you can afford the monthly payments for any loan you take out, as defaulting will only further hurt your score.

Final Thoughts

Fixing and maintaining your credit score isn’t a one-time task. You’ll need to continue working on it and checking it throughout your lifetime. By being mindful of how you use your credit card and the types of financing you apply for, you can steadily increase your credit score while building a healthy payment history.

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