How to Repair Your Credit Score

Whether you like it or not, you and your credit score are inseparable. Your credit score, also referred to as your FICO credit score, can either be your secret weapon or your Achilles’ heel. Thankfully, you have some control over where you fall on the credit score scale between 300 and 850.

How credit scores work

The better credit score you have, the less it will cost you to borrow money. A good credit score signals to lenders that you're a trustworthy borrower. The less trustworthy you appear, the more expensive it will be for you to get a loan. If you have no credit or very bad credit, then lenders won’t be willing to lend you money at all.

What your FICO credit score affects

Where you fall on the credit score range affects loans such as:

• Student loans
• Auto loans
• Credit cards
• Personal loans
• Mortgages

Besides borrowing money, your credit score can affect other areas of your life, too. For instance, your credit score can have an impact on your:

• Ability to get a job or professional licensing
• Ability to get a place to rent
• Personal relationships
• Property and car insurance

How long it takes to repair your credit

Repairing your credit could take anywhere from a few months to years—all the way up to a decade. How long it takes to repair your credit depends on your current credit standing.

Things that knock your credit scores like late payments and collections will stay on your credit report for seven years. The farther back in the past things like missed payments are, the less they will affect your credit score in the present.

Larger blows like Chapter 7 bankruptcies and unpaid tax liens can stick with you for up to ten years. More serious offenses like these won’t be as easily diminished by time as some missed payments would be.

Are credit repair businesses worth it?

If you’re on a low rung on the FICO credit score ladder, you can start the climb upwards as soon as today. Even if you have a long way to go, be wary of credit repair businesses, scammers or not. There’s no shortcuts or magic that these businesses have that can help you more than you can help yourself. What’s more is that you’ll need to pay for these services, setting you even further back into debt. In short, credit repair businesses are not worth it.

10 Steps to Improving Your Credit Score

Part I: Get a bird’s eye view of your credit

1. Get your credit reports
2. Check your credit reports for errors
3. Protect your credit from identity theft
4. Take an honest look at your cash flow

Part II: Make a credit repair plan

5. Understand what affects your credit score
6. Catch up on payments
7. Payment history: Pay your bills on time and in full each month
8. Amounts owed: Keep low

Part III: Maintaining good credit for the long haul

9. Manage new and old credit wisely
10. Length of credit history: maintaining your credit repair plan

Part I: Get a bird’s eye view of your credit

1. Get your credit report and score

The first step to repairing your credit is to find out where you currently stand. You can request your own credit report and credit score from the three major credit bureaus:

• Experian
• TransUnion
• Equifax

If you want to know the difference between your credit report and credit score, read our complete guide to your credit score.

Checking your own FICO credit score counts as a soft credit check, meaning it won’t hurt your credit score. Hard credit checks—which do hurt your credit score—happen whenever you apply for credit. When you apply for a new loan or credit card, the lender will check your credit score to determine how risky of a borrower you appear to be.

What is a good credit score?

Look for your FICO credit score on your credit reports, which will be a number between 300 and 850. Based on your credit reports, determine where you lie on the FICO credit score range:

• Exceptional: 800 – 850
• Very good: 740 – 799
• Good: 670 – 739
• Fair: 580 – 669
• Poor: 300 – 579

To get the best interest rates on loans, you’ll want to fall above 740 on the credit score range. If you fall in the fair to poor range, aim to get in the good range first before setting your sights higher.

2. Check your credit reports for errors

Once you have your credit reports, check them for errors. Look at things like wrongly reported missed payments, late payments, and accounts you never opened.

Also check to make sure negative information on your credit report is not on there longer than it’s supposed to be. For instance, if it’s been more than seven years since that late payment or foreclosure, it should be removed from your credit report. For bankruptcies, it’s ten years.

No—checking your credit report for errors is not wishful thinking. More than one in five consumers have a “potentially material error” in their credit file that makes them look riskier than they really are.

To dispute an error on your credit report, start with this sample dispute letter to explain what information you think is accurate. After sending a detailed account of disputes on your credit report, the credit bureau should investigate your claims within a month. At the end of the investigation, you can expect the credit bureau to send you the results in writing along with a free copy of your report if the dispute results in an update of your credit report.

3. Protect your credit from identity theft

Besides errors made by the credit bureau, the other reason you want to check your credit reports is to make sure you aren't a victim of identity theft. With the recent Equifax breach and the increasing number of data breaches, it’s not unreasonable to check your credit report for fraud.

Whether or not you’re a victim of identity theft or credit fraud, it’s a good idea to freeze your credit. If you freeze your credit, that means nobody—yourself and thieves included—will be able to open an account or to get credit under your name. Know that freezing your credit won't protect you from everything though, like your already existing lines of credit.

If your credit is frozen and you do want to open a new line of credit, all you have to do is thaw your credit, or lift the credit freeze, with the password you were given. This prevents fraudsters with your information from opening an account in your name. You can even lift a credit freeze temporarily so that you don’t have to go to the trouble to set it up again later.

Freezing your credit is a low cost for the potentially high costs of identity theft. A fraudster opening a line of your credit in your name could seriously damage your credit score. Here’s where to go to freeze your credit at each credit bureau:

• Experian Credit Freeze
• TransUnion Credit Freeze
• Equifax Credit Freeze

4. Take an honest look at your cash flow

Now that you’ve taken a good look at your credit, it’s time to look at your own finances. If your credit score is low because you’ve been spending more than you’re making, it’s time to make a change.

To improve your credit score, you need a positive cash flow. In other words, you need to have more cash coming in than going out.

You’ll need to have enough cash to pay off all of your credit card debt, and enough in the long-term to stay out of credit card debt for good. You’ll also need enough to cover your living expenses and make minimum payments on larger debts, such as a mortgage or student loans.

If you have a negative cash flow, your options are:

• Decrease your costs
• Increase your income
• Both

If you’re looking to decrease costs for the long haul, think big rather than small. For instance, look at changing big things like monthly bills before you start nickeling and diming every coffee purchase. Living within your means with things like your rent, car payment, and even negotiating a lower phone bill will allow you to live life without the stress of every purchase and save money more easily.

You can increase your income by negotiating a raise or picking up a side gig in the sharing economy. Check out this list of sharing economy companies to explore your options.

Part II: Make a credit repair plan

5. Understand what affects your credit score

To give your credit score a boost, it’s necessary to know what goes into calculating your credit score. Here’s a quick rundown:

Payment history – 35%

It’s no surprise that your credit history takes the biggest slice of the pie in determining your credit score. Your payment history includes information such as if you paid your bills in full and on time, and if late, how late. It also includes any delinquencies such as collections, bankruptcies, and foreclosures.

Amounts owed – 30%

Your credit score takes into account your credit utilization ratio, or the amount of credit you use compared to how much you could be using. For instance, if your total available credit limit was $10,000 and you were regularly using $1,000 of it, then your credit utilization ratio would be 10%. While using less credit is always better, that doesn’t apply if you’re using zero credit. Owing $0 doesn’t prove that you’re capable of paying back any money.

Length of credit history – 15%

How long you've been paying off credit factors into your credit score. The longer your credit history, the better—assuming you've been fairly decent at making your payments.

New credit – 10%

When you apply for new lines of credit, lenders do a hard credit check, which will temporarily decrease your credit score. The more lines of credit you open at once, the worse it is for your credit score. If you take out a bunch of credit at once, it makes it look like you will be less likely to be able to make payments since you have more credit to pay off.

Mix of credit – 10%

How many accounts you have as well as the types of credit you have factor into your overall credit score. For instance, having a mix of credit cards, loans, and mortgages show you are capable of paying off multiple types of debt, and handling them simultaneously.

6. Catch up on payments

If you're not current on payments, this should be your number one priority when it comes to repairing your credit score. Catching up on payments will get you to square one with your payment history. A positive cash flow (step four) will enable you to get there.

Get caught up on your minimum payments and even consider requesting a goodwill adjustment from your lender to remove the late payments from your credit report. Pro tip: you may be able to negotiate the removal of the late payment on your report better if you offer to sign up for automatic payments.

7. Payment history: Pay your bills on time and in full each month

Beginning to make your payments on time will positively affect your payment history, the largest factor in your credit score. Make credit card payments in full each month for an even bigger boost to your credit score. That means only spending what you have.

Going forward, this should be your M.O.: treat credit cards as debit cards, and ensure you can afford the minimum monthly payments on other, larger lines of credit such as student loans and mortgages. That means your entire income should more than cover all of your living expenses and larger debt payments.

8. Amounts owed: Keep low

Keep your credit utilization ratio low. The less credit you use out of the amount that you could use, the better.

Most finance experts recommend keeping your amounts owed less than 30% of your total credit limit. That means if your credit limit on your credit card is $5,000, you should be spending a maximum of $1,500 on your credit card each month.

Don’t get carried away if you are using your credit card to get credit card rewards or points. If you’re serious about raising your credit score, try using your credit card sparingly, and keep your credit utilization as low as possible. Making a purchase or two a month and paying them off in full and on time is the best thing you could do for your credit.

Part III: Maintaining good credit for the long haul

9. Manage new and old credit wisely

Steps six through eight—getting caught up on payments, making payments in full and on time, and using a very small amount of credit—are the main tenants of building up a good credit score. Over time, those steps cover building up a strong payment history (35%), keeping your amounts owed low (30%), and lengthen your credit history (15%). So what about the remaining 20% that affects your credit score—new credit and mix of credit?

How opening a new line of credit will affect your credit score

Opening a new line of credit will make your credit score dip. This is because new credit increases the amount of debt you could potentially owe and because it will lower your average credit age. Yet, if you have little credit history, opening a new line of credit could increase your credit score after some time since you'll be raising your credit limit.

In other words, let’s say you’re spending $100 per month on your one-and-only credit card, which has a credit limit of $1,000. That means your credit utilization is 10% ($100 / $1,000 = 10%). If you opened up another credit card—let’s say with a credit limit of $4,000—and you still spend only $100 total on your credit cards per month, then your credit utilization ratio drops to 2% ($100 / $5,000 = 2%).

Unless you have no-to-little credit history, don’t open a new credit card just to increase your overall credit limit. For those needing to prove they can handle more credit, it could give them a boost to open up a new credit card with a high credit limit—assuming they use the same amount (or even less) credit as before. But for everyone else, opening up a new credit card will just hurt your overall credit score.

On your mix of credit, and when to open a new line of credit

As a rule of thumb, you should only open a new line of credit if you need it. All credit is debt, and debt is expensive. This means don’t open different types of credit just to try to improve the “mix of credit” 10% of your credit score.

If you do need to open a new line of credit—say, get a mortgage, or a student loan—be mindful of when you open it. Opening many new lines of credit at once can tank your credit score, so space them out as much as possible.

Credit builders

If your credit is exceptionally low, you may have problems getting any type of credit. You may find yourself in a catch-22 if you can’t get a line of credit to prove that you can pay it off.

Thankfully, there are some options that can help you rebuild your credit.

Credit builder loans

Credit builder or “fresh start” loans can help you build up your credit whether you’re starting with no credit or bad credit. When you’re approved for a credit builder loan, the money you borrow is placed in an account. Once you’ve finished paying off the loan, you’ll have access to the money.

If you pay off the loan responsibly, you’ll have created a decent payment history, which will increase your credit score.

Secured credit cards

If you have some money saved up, a secured credit card can be a great tool to rebuild your credit. Like prepaid debit cards, your secured credit card will be backed by real cash. If you put $500 in cash on your secured credit card, typically your credit limit will also be $500.

Unlike prepaid debit cards, you’ll technically be borrowing money from the lender. Your payment history on the secured credit card will be reported to the credit bureaus, which can help build your credit.

Get a cosigner

Another option is to get a co-signer on a new line of credit. Again: don’t bother getting a new line of credit unless you were planning to anyway.

Getting a cosigner on a credit card or loan helps you build up your credit while giving lenders more peace of mind. Make sure you and your cosigner know what you’re getting into before signing up. If you fail to make payments, your cosigner will be on the hook for payments.

10. Length of credit history: maintaining your credit repair plan

Repairing your credit isn’t a one-time project. Rather, it’s a lifestyle change.

Your credit ebbs and flows with your financial and life decisions, and it’s harder to build up than it is to make it drop. If you’re serious about repairing your credit score, you’ll need to:

• live within your means,
• pay down your debts,
• and stick to it.

The longer you have a good payment history, the better it is for your credit score. To make it easier, consider getting in the habit of using some credit management tools. After a quick setup, credit management can make your life easier and less stressful. You’ll be able to see what’s going on with your money, your credit score, and your existing debt.

Credit management tools

• Track your credit score and get your credit report with Credit Sesame or myFico.

Credit Sesame and myFico give you the ability to track changes to your credit score in real-time. They can help you identify what factors you could improve on to increase your credit score and help motivate you to stick to your credit building plan.

• Manage your money with Mint.

Mint can help you manage your entire financial life, including credit monitoring. If money management is the cause for your subpar credit score, Mint’s digital envelope budgeting system and bill reminders can go a long way in helping you organize your financial life.

• Manage your debt with ReadyforZero.

With ReadyForZero, you can add all of your debt accounts and create a plan to pay them off. It’ll track your progress and, like Mint, can send you reminders when payments are due. If you decrease the amount of debt you owe to a level well within your means, getting an exceptional credit score will be easy as pie.