It is possible to fix a bad credit report, but it cannot be done overnight. Consumers need to make a conscious effort to reduce their debt and know their rights.
If they do a few things to modify their financial situation, they can fix bad credit in a relatively short period of time. Here are a few tips that will help consumers get on the road to a good credit score.
1. Consumer Rights
Consumers have the right to know their credit score and request changes for no fee if they find any inaccurate information on their credit report.
The national credit reporting companies are required to provide consumers with a free copy of their credit report every 12 months, if the consumer asks for it.
An information provider such as a bank, insurance company or an employer may give inaccurate information to the credit reporting companies.
The credit reporting company and the information provider are responsible for correcting this inaccurate information at no cost to the consumer. This is why the first step towards a good credit report is to make sure it is accurate.
2. Missed Payments
Consumers in debt are more likely having trouble making the required payments on their debts such as credit cards, home mortgages or car loans. Creditors are usually happy to talk to debtors about their debt and will help them find a way to catch up on missed payments.
It is in the lender’s best interest to help consumers who are sincere about repaying debt. The alternative is the lender has the added expense of going to court. There are also non-profit credit counseling agencies who will help consumers organize their finances.
The company should be accredited by the Consumer Credit Counseling Service and not a scam. They will talk to the lenders to create a plan for the debtor and may lower interest rates and reduce payments. In any case, they help consumers handle their debts. It is also important to make sure the rent and utilities payments are made on time.
3. Debt Repayment
There are three main ways to repay debt. One is to start with the debt that has the highest interest and completely pay it off. The other is the opposite. Start with the lowest interest and completely repay it before going on to the next.
While starting with the lowest interest rate may boost morale because the debt is paid faster, starting with the highest rate may save more money in the long run. Paying the high interest debt first will also give a better credit score.
4. Missed Payments
When and how often consumers pay their bills counts for 35 percent of their credit score. It is worth setting up payment reminders on bills or arranging for them to be paid automatically from a bank account. This way, they won’t miss payments from forgetfulness.
5. Get Credit
Consumers need to have a record of repaying credit to fix bad credit, but they may not be able to get an unsecured credit card. They can begin with a secured credit card, which will require a deposit of money that is equal to the credit limit.
This is put into a special savings account as security on the card for the bank. After making regular payments for a few months on the secured card, the consumer can request an unsecured card. It is usually easier to get approval for an unsecured card from a department store, so this is a good place to start.
The consumer should use it sparingly and try to repay the whole balance every month. After six to 12 months, they can apply for a regular bank credit card.
6. Use Credit
For a credit report, the important part is the amount owed compared to the total amount of credit allowed. This is why it is recommended to pay down as much credit as possible.
Even if the consumer has several credit cards they have not used for a long time, they should not close them down.
This will impact the length of their credit history and could negatively impact their credit score. If the card has an annual fee that the consumer wants to avoid, they can request to change to a card that has no fee.
It may lower the credit score if the consumer opens several new credit cards that they don’t need just to increase the available credit.
7. Reduce Spending
This may be the hardest part of fixing bad credit, but it is a very important part. Consumers should find ways to spend less, at least until they have paid down a major portion of their debt.
The best way to do this is to pay cash as often as possible and use credit cards less often. Cancelling credit cards will not change a credit score.
A reputable credit counseling company will help consumers make a budget and find ways to stick to it. There may be several ways to reduce spending that may take an outsider to find.
Expensive coffee, lunches at restaurants, bottled water and more home-cooked meals are all ways to reduce spending that will add up to a lot of money over several months.
Another way to control spending is to have two bank accounts. One is for paying debt and the other is for everyday spending. This is a good way for consumers to force themselves to stay within their budget.
Once a consumer has repaid a debt, they should get a settlement letter from the lender and send it to the credit bureau. This will update the credit report immediately and positively impact the credit score.