How To Fix Your Credit: A Step-By-Step Guide

As hard as we try, our credit score can go up and down. If yours has taken a dip, the good news is there are a series of steps you can take to turn your credit situation around. It'll take a bit of effort, but in time you should see results. Here, we'll walk you through the basics of credit scores, the reasons why your credit might need a makeover, and steps to take to fix credit. 

What Is A Good (Or Bad) Credit Score?

Why You May Need To Repair Your Credit

If you've ever been denied a loan application or received a credit line with sky-high interest rates, you know how important having good credit is as a consumer. 

Having a less-than-stellar credit score – in the low or fair ranges – makes it more challenging to get approved for financing. Plus, it'll be tougher to land low rates and favorable terms. In turn, you could be spending more in interest fees. 

There are many reasons why your credit score might have tanked, including: 

• Bankruptcy
• Unpaid bills
• Medical debt
• Excessive credit inquiries in a short time
• Closed credit accounts
• Consistently high credit utilization (aka high credit card balance) 
• Too many late or missed payments 
• Unpaid debt gone to collections
• Liens 

Benefits Of Fixing Your Credit

As we talked about, the main benefit of improving credit is so you can get approved for home loans, auto loans, credit cards, and rental properties with the best rates and terms. A higher credit score can mean having more options, and low rates, which means money saved in interest fees. 

You'll also have access to better credit card rewards, stand an easier chance to be approved for rental properties, and potentially enjoy lower insurance rates. 

How To Fix Your Credit In 7 Steps

Fixing your credit is a combination of knowing the rules of credit, then being methodical in your approach. Here's how to repair your credit on your own, step by step: 

1. Check Your Credit Report

Checking your credit report can help you spot any errors or missing information. It can also help you get a bird's-eye look at the state of your credit. In turn, you'll be able to have a greater understanding of what you can do to rebuild your score. 

You can order a credit report for free through AnnualCreditReport.com. You'll need to request a separate report from each bureau. To do so, you'll need to fill out a form, choose the reports you want – Equifax®, Experian™ and TransUnion®. Then, you'll need to answer some security questions. These verification questions are designed to protect your personal information. 

2. Dispute Inaccuracies On Your Credit Report

It turns out that errors on your credit report are quite common. Recent research finds that more than one-third (34%) of U.S. consumers spotted at least one mistake on their report. Depending on the error, it could hurt your credit. 

Here's what to keep an eye out for when looking over your credit report: 

• Identity errors: Common identity errors might include the wrong name, phone number or address; accounts on your report that belong to someone else who has a similar name as yours; and accounts that aren't yours from a case of identity theft. 
• Duplication errors: Duplication errors might be accounts that show up multiple times, but with different lenders or creditors. 
• Reinsertion error. This is when incorrect information is fixed, then is reverted back to the wrong info. 
• Balance errors: Examples of balance errors are accounts with the wrong credit limit or balance reported. 
• Account errors: This includes closed accounts that are listed as open, when you're listed as the owner or the account but you're an authorized user – or the other way around, and the wrong date of payment, the date it was opened, or the date of your first delinquency. 

If you've spotted an error on your credit report, you can reach out to each of the credit bureaus and file a dispute. You can typically file a dispute online, by mail, or over the phone. 

To dispute an error, you'll need to include your contact information, the credit report confirmation number, the error you'd like reviewed, and an explanation of why you're disputing the info in the first place. 

Last, you'll want to request the info be removed or fixed. If you're making the request via mail, you'll need to attach a copy of the credit report and copies of any supporting documents. Federal law requires the credit bureau to look into the dispute and get back to you within 30 to 45 days after you've filed the request. 

3. Check Your Credit Utilization Ratio

Your credit utilization ratio is the percentage of the total credit limit you're using on your revolving accounts. To calculate your credit utilization ratio, you tally up your total credit card balances, divide them by the total credit card limit, and then multiply it by 100. 

For example: You have three credit cards. Your current credit card balance is $3,000, and your total card limit across your three cards is $12,000.  

$3,000 divided by $12,000 = .25 x 100 = 25% 

In this case, your credit utilization ratio is 25%. The lower your credit usage, the better your score. So ideally, you'll want to keep it as low as possible. 

4. Pay Down Your Debts 

Paying down your debt helps you keep your credit utilization low. Once you pay off one of your debts, it makes it all that much more manageable to work on crushing your remaining debt. Plus, it'll prevent you from digging a debt hole in the future. 

To start, make a list of your outstanding balances, noting the amount, interest rate, and payoff period — if any. Next, consider two popular debt payoff strategies: 

Avalanche method. The avalanche method is a tactic that involves paying off your debt in the order of highest interest rate to lowest interest rate. You start by throwing your debt payoff efforts into your highest-interest rate debt, then work your way down. The big benefit of the avalanche method is you save money on interest fees. 

Snowball method. The snowball method is when you start by paying off the debt with the lowest amount. Once you pay that off, you put the money you were spending toward the debt with the next lowest amount, and so forth. 

The main advantage of the snowball method is you pay off your debt quicker, which can prove motivating. In turn, you might have an easier time staying focused on your debt payoff efforts. 

5. Make Regular, On-Time Payments

Your payment history makes up a major chunk of your credit score – 35%, to be exact. It's important to make it a top priority to stay on top of your debt payments. To make at least the minimum debt payments, see if you can move your payment due date, use the Rocket Money℠ app to manage your bills, and set up auto pay. 

6. Consider Consumer Credit Counseling

If you feel like you're drowning in debt or are chronically anxious, overwhelmed or stressed with your finances, you might want to work with a credit counseling service. 

Working with a consumer credit counseling organization can help you make sense of your debt, get a better grasp of your financial responsibilities, and see what your options are. Many of these nonprofit credit counseling companies offer a debt management plan. 

Instead of making several debt payments to your lenders and creditors each month, you make a single payment to the credit counseling company, and they pay your debt on your behalf. They can also help negotiate with the lenders and creditors to lower your interest rate or monthly payments. A downside of going this route is they might recommend that you to close your credit cards, which can lower your credit score in the short-term. 

7. Consult A Credit Repair Company

If you have errors or negative information on your credit report, a credit repair company can reach out to the credit reporting bureaus for you. This can, over time, help you improve your credit score. 

You'll want to proceed with caution: credit repair companies can charge significant monthly service fees. You want to be sure they are helping you do something you can't do on your own (aka filing a dispute with the credit company directly) and are really helping you fix your credit. 

Additional Tips To Help You Fix Your Credit

Besides taking the following steps we've talked about, here's what you can do to go beyond and repair your credit for the long term:

Keep Unused Credit Cards Open

Why even keep inactive credit cards open in the first place? Remember: Your credit history makes up 15% of your credit score. The age of an account is a positive indicator, so closing an account can negatively impact your score. 

Only Take Out Credit If You Need It

While taking out credit can help increase your credit limit which in turn lowers your credit utilization, too many credit inquiries in a short span of time can bump down your score. Plus, it might make it easier for you to carry a higher balance simply because you have more accessible credit. Be prudent in opening new lines of credit, and only take out credit if it's absolutely necessary. 

Become An Authorized User On A Credit Card

An authorized user on a credit card means you can put purchases on a card where you're not the primary account holder. How this helps build your credit is that your credit file is linked to the primary account holder's financial behaviors. So if they have a strong credit score and stay on top of their payments, it can help boost your score. 

Monitor Your Credit Regularly

Keeping watch on your credit can alert you of any suspicious activity, and help you understand what brings down your score. In turn, it can help you make better financial choices and develop money habits that lead to a strong credit score. 

You can use a credit monitoring service. Many credit cards and apps like Rocket Money offer credit monitoring for free or a small fee. 

Fixing Your Credit FAQs

Here are some frequently asked questions about credit, answered: 

How long will it take to fix my credit score?

The time it takes to repair your credit varies. But, on average, you should start to see improvement within 3 – 6 months after taking steps to fixing your credit.

How long does negative information stay on my credit report?

Only inaccurate, fraudulent and outdated information can be removed from a credit report. If the negative information is accurate, it will stay on a credit report for up to 7 years on average.

How can I avoid fraudulent credit repair companies?

Discuss that repair companies are subject to federal laws, including the Credit Repair Organizations Act and Telemarketing Sales Rule. To avoid fraudulent credit repair companies, do your homework and check the Federal Trade Commission's (FTC) data and Consumer Financial Protection Bureau's (CFPB) consumer complaint database. 

The Bottom Line

While fixing your credit doesn't have to be complicated, it requires consistent focus. Slow and steady will help you build your credit over time. The good news is tools are at your disposal, including the Rocket Money app, which can help you monitor your credit and maintain your budget.