Do you want to repair your credit but don’t know where to start?
Credit repair can be confusing and sometimes feel like an impossible task, but it’s important to repair credit if you want to get approved for loans or credit cards.
Our Ultimate DIY Credit Repair Guide is the perfect place to start. It provides simple, step-by-step instructions that will help you improve your credit score. You can do it yourself and save money in the process!
A good credit score is essential for getting approved for a mortgage, car loan, or job. In addition, being able to handle your credit will determine the success of your financial future.
In this DIY credit repair guide, we’ll cover why credit is so important, factors that make up your credit, and the steps you can take to improve your credit score starting today.
What is Credit?
Credit is a measure of how likely an individual or business is to pay back borrowed money. It conveniently allows consumers to buy things now and pay later. Credit makes up your credit score, which lenders use to determine whether they should extend you credit, the terms of that credit (interest rate), and how much you can borrow.
You need a credit history where your good and bad financial activity is recorded to get credit. Then, when applying for credit, creditors will check your report to see what kind of borrower you are, among other things.
The credit report contains information such as your previous and current loans, how much you owe on each loan, if you’re up-to-date with payments and any other outstanding bills. It also indicates whether or not there have been late payments.
Creditors use the information in your credit report to calculate a credit score, which rates your creditworthiness based on five key categories:
- Payment history
- Credit utilization
- Length of credit history
- Types of credit in use
- Recent credit inquiries (hard inquiry)
A good credit score is around 670 or higher. If you have a low score (350-580), you’ll most likely be denied when applying for loans or credit cards. If you have a fair credit score (581-669), you’ll have to pay higher interest rates and fees, and if your credit is good (670-699) or better, you’ll be able to take advantage of better interest rates and will be approved for most credit cards depending on where your credit score sits.
The Importance of Credit
Credit is crucial because it helps you gain access to loans and lines of credit. Without credit, you won’t be able to get approved for any type of loan, including mortgages, cars, or student loans.
Good credit not only gives you better borrowing opportunities but also opens up other benefits like lower interest rates on loans and insurance premiums. It can also help you land a job because employers may check your credit score as part of the hiring process.
The ability to borrow money is also important because it allows you to build wealth by buying homes, cars, and other investments. You can also qualify for low interest loans that help you maintain your lifestyle even if your income fluctuates with good credit.
Lenders use the major credit bureaus are Experian, Equifax, and TransUnion. Each credit bureau has its own scoring model. And while each has its differences, much of the vital information on your credit reports will be the same as creditors typically report to all three.
Understanding the Credit Score Range
The most popular credit scoring system is FICO. Most lenders use your FICO score when determining whether or not to give you credit. FICO scores range between 350-850 with five distinct categories of credit health.
Poor 350-580: If your score falls in this range, you’re considered a credit risk and will likely be charged higher interest rate when applying for new financing. More often than not, you’ll be turned down for credit cards, loans, and lines of credit. Typically, you will have had numerous delinquencies and/or past due accounts and a history of bankruptcy.
Fair 581-669: If you score in this range, you’ll be considered a high-risk borrower and might not get approved for loans or credit cards. Your interest rates will reflect your riskiness, but some lenders will take on the challenge of lending to you. Typically, you’ll have had a few delinquencies and/or past due accounts.
Good 670-739: If you score in this range, creditors will be willing to work with you but keep an eye out for the interest rate. Most credit card companies, department stores, and auto financing companies will be able to approve you for their deals because they consider you a reasonable risk. Typically, you’ll have had no delinquencies and/or past due accounts. If you have any delinquencies, they have taken place years ago and have had a good track record since then.
Excellent 740-799: If your score is in this range, you’ll be approved for most credit cards and loans at the best possible interest rates and terms. You can expect to receive special perks such as cashback or frequent flyer miles. If you’re looking to buy property, good credit will allow you to get a lower interest rate on your mortgage. Generally, there won’t be any delinquencies and/or past due accounts in your credit history.
Perfect 799-850: If you score in this range, you’re considered an excellent credit risk and will qualify for the best rates and terms on loans. You can expect to receive special perks such as cashback or frequent flyer miles. As a result, your credit is very strong, and you’ve likely paid all of your bills on time.
Credit Score Factors
Ever wonder how your scores are calculated? 5 key factors affect your credit scores, and while they are all important, they are weighted differently, which plays a big decision in how your credit score fluctuates.
1. Payment History (35%)
Your payment history has the most significant impact on your credit score and is perhaps the most critical factor to look at when trying to improve your credit health.
This category includes information such as whether or not you pay bills on time, if you’ve been charged with anything late, if any bills have been sent to collection accounts and how often you’ve paid your credit card balances in full each month.
All of this information counts towards 35% of the FICO score formula.
2. Amounts Owed (30%)
The amount of debt you owe is considered another important factor by credit bureaus.
Your credit utilization – how much of your available credit you’re using – plays a big role in this category. This section is measured by looking at the balance on all of your accounts and then comparing it to the amount available for you to use (your credit limits).
To calculate your credit utilization ratio, divide your total balance by your available credit and multiply that by 100 to get a percentage.
For example, if you have $3000 in credit card debt and $10000 in available credit, your ratio would be 30% ($3000/$10,000).
For a better score, keeping your debt owed below 30% is ideal and will help boost your score.
3. Length of Credit History (15%)
The length of your credit history is also important to look at when you’re trying to improve your credit score.
This section takes into account the average age of all of your accounts as well as how long it’s been since you opened an account with a creditor.
The average age of your accounts is another number that you’ll need to calculate. To get this number, add up the ages of all of your accounts and then divide by the number of accounts that you have.
4. New Credit (10%)
New credit accounts for 10% of your FICO score and will look at how many you’ve recently opened.
A high number of new credit inquiries isn’t a good sign and can lower your FICO score, so it’s essential to check your credit reports at least once a year for any new accounts that may have been opened in your name.
5. Credit Mix (10%)
The types of credit that you have also makes up 10% of your FICO score.
The most commonly used type of credit is a revolving account, which includes accounts where your balance can fluctuate month to month, such as credit cards. This category also includes information about certain types of loans you’ve applied for, including mortgages, student loans, and auto loans.
Now that we have established the credit score ranges and what factors make up your credit score, as a next step. we will begin discussing the best ways to improve your credit score.
10 DIY Credit Repair Tips
1. Check Your Credit Report
The first step to improving your credit scores is regularly checking your credit report for errors, incorrect information, and any accounts that may have been opened without your knowledge.
This will help you catch anything suspicious right away so that you can take the appropriate measures. In addition, you are allowed to receive one free credit report each year from AnnualCreditReport.com, and it’s a good idea to regularly check this website for any updates or changes that may need your attention.
2. Track Your Spending
Tracking all of your spending is also important but should be done in conjunction with checking over your credit report so that you can get an accurate assessment of your credit situation.
If there’s a large balance on any one account, it might be a good idea to pay down the balance and keep it low until you’re able to improve that account’s credit score. This will help lower your credit utilization ratio if that number is too high.
3. Dispute Inaccurate Information
If you find anything on your credit report that’s inaccurate, it’s important to send a credit dispute letter to the credit reporting company as soon as possible.
Make sure that you keep track of all communication and put everything in writing to prove if necessary. You can include supporting documentation such as receipts or bills to prove that what you’re saying is true.
4. Pay your Bills on Time
Always make sure that you pay all of your bills on time, including credit cards, loans, and any other type of recurring payment.
If you can only afford to make the minimum monthly payments, it still makes an impact. Payment history makes up 35% of your credit score, so it’s important to keep track of when these accounts are due to avoid late fees or an account being sent to a collection agency.
5. Fix Past Due Accounts and Collections
Any past due accounts or collections on your credit report can damage your credit score, but they might also affect you more severely the longer they’re left unpaid.
As mentioned, payment history is one of the most important factors when it comes to improving your credit scores, and paying down any balances as quickly as possible is an excellent way to keep a clean credit report.
6. Improve your Credit Utilization Ratio
Credit utilization ratio refers to the amount of credit you have available to use versus how much you use. You can calculate this number by taking the total credit limit across all of your accounts and dividing it by the current balance on those accounts, then multiplying that number by 100%.
You’ll want to keep your utilization low. A utilization ratio of 30% or higher is considered a bad thing by most credit reporting companies, so it’s a good idea to keep this number below that.
This can be difficult if you have a large credit limit on one account and smaller limits on the rest, but it’s important not to max out your credit cards.
Pro Tip: Besides paying off your debt each month, consider asking your credit card company for a credit line increase. This will lower your debt to credit ratio and can help improve your credit score.
7. Avoid Opening New Credit Accounts
If you’re trying to improve your credit score, it might actually be a good idea to avoid opening new accounts, such as a new credit card, while trying to get there. If you open too many new accounts at once, this can lower your average age of accounts which is another factor that contributes to your credit score.
Leave any major purchases until after you’ve fixed your credit score to avoid any additional damage.
8. Get a Secured Credit Card
If you can’t get approved for a new credit account, it might be a good idea to apply for a secured credit card instead.
This type of card works like any other credit card but requires that you deposit money with the bank before using the account.
These accounts can be a great way to check your credit score and may even help improve the overall situation.
9. Don’t Close Old Accounts
Another tip to improving your credit score is not closing any old accounts you may have had before. Even though some accounts may no longer be in use, they still show up on your credit report and can help boost the average age of all of your accounts.
10. Have the Right Credit Mix
Having the right credit mix is another important tip to improving your credit score.
Credit reporting companies look at your type of credit accounts to see what’s most popular with you, which helps indicate how responsible you are with your debt. When it comes to types of loans, having a variety can be beneficial.
For example, if you have 15 credit accounts in total, it’s a good idea to have at least one installment loan, two revolving lines of credit, and one mortgage or auto loan.
Credit Repair Services – Is it worth it?
If you’ve done any research on credit repair, you’ve certainly come across a few credit repair agencies. In addition, you’ve probably asked yourself if you should hire one of these companies to repair your credit for you.
The answer to this is maybe. It depends on your current credit repair goals and your time frame.
If you are looking for ways to maintain your good credit score, or have a few items that you’d like to do to see an improvement and aren’t in the market for a home or auto loan, then you can probably do it yourself without paying a monthly fee to a credit repair agency.
However, if you are in the market for a home, car, or large loan (e.g., $30k+) and want to improve your credit score as quickly as possible, utilizing credit repair agencies might be worth it.
Or if you have severe issues on your credit report such as bankruptcy, collections, multiple late payments, and need to improve your score quickly, then hiring credit counseling agencies might be your best option.
Before using any company for credit repairs, make sure you understand the process and how it could affect your credit in the long run. Most importantly, ensure that they aren’t advertising unrealistic results on their websites.
Finally, if you decide to use a credit repair agency, you’ll want to choose one with a good reputation and positive reviews. Credit Saint and Sky Blue Credit Repair are two companies with high customer satisfaction.
How Long Will It Take to Improve My Credit Score?
Finally, this is probably the most asked question about credit repair. How long will it take?
The answer to this question will vary from person to person and their credit situation, but a good rule of thumb for a new credit score is in three months. However, some people have reported seeing an improvement in their scores after just 30 days.
That said, you should aim for at least 6-9 months to give yourself the best chance.
This is just another way of saying that you should spend about 6-9 months working on rebuilding your credit score, and after this time has passed, you should see significant improvement in your score.
Going back to our example, if your initial credit score after accruing negative items was 650 – let’s say the average credit score is between 650 and 700 – you can expect your credit score to improve by about 15% with three months of work, 30% with six months, and 50% with nine months.
The best way to do this is by working on each item one at a time, making sure that they are removed or improved before moving on to the next one until all of your negative items are gone. While it may take longer than you like, the good news is that the positive changes will make your credit golden for the first time in a while!
Wrapping it Up
Overall, there is no going around the fact that credit repair is hard work.
But you can make the credit repair process easier by utilizing free online resources to help gather information about your current credit score and your rights. And for more severe credit issues, by all means, contact a professional credit repair company to get the job done quickly.
As for your credit score, if you want to improve it, the best thing would be to check your credit report regularly. You may have heard that you should check your credit every four months – this is not true for everyone. Depending on your goals, you’ll want to check your credit report every 60 days to see if any improvement is made. This will give you an excellent idea of where you are headed and if anything needs to be fixed.
Fixing your credit will take time, but sticking to a schedule and knowing what you’re doing will help make the process much more bearable and less overwhelming.