By following the five simple steps outlined below, you can put your personal credit rating back on the right track and begin to improve your financial outlook today.
1. Get to Know Your Credit Profile
The first step in rebuilding bad credit is to determine if you actually have bad credit to begin with. Believe it or not, many Americans go through life assuming they have bad credit due to some past struggles, when in fact their credit rating is pretty good or even excellent. How do you know the difference?
Get a copy of your credit report from a reputable service such as Free Credit Score. If your credit score falls below 620, most lenders would view you as having bad credit. If your credit score is above 680, you generally have good credit. Anywhere in between, and you have what's deemed as fair credit. Now that you know where you stand, let's take a look at how to improve your credit.
2. Dispute Inaccurate Items
Look over your credit report very carefully. Are there any items that don't seem quite right to you, no matter how big or small?
• Is a lender reporting that you paid 30 days late, when in fact you did not?
• Do any outstanding balances on your report look a little off?
• Are there any accounts listed that shouldn't be there in the first place?
It is crucial that the credit bureaus have an accurate picture of your behavior with creditors. Any little item could make a big impact on your credit score, and it is up to you to ensure that every item on your report is accurate. Just by getting a balance you owe reported accurately as $50, rather than inaccurately at say $770, you can possibly drive your credit score higher.
If you notice any inaccurate items, contact the credit bureau directly to challenge it. Whichever credit report service you choose will provide you with phone numbers to the credit bureaus and/or other ways for you to dispute inaccurate items.
3. Don’t Close Accounts
Sometimes your first instinct when you decide to rebuild your credit is to close down all the revolving accounts you experienced problems with in this first place. Often, this can be a serious mistake.
Your goal is to show creditors that you can use credit responsibly -- in other words, that you can use your credit line and make payments to it on a regular basis. How are you supposed to accomplish this without any open accounts? By keeping your existing accounts open, it will allow you the opportunity to use and pay on them regularly, and over time this could help boost your credit score and your standing with lenders and creditors.
4. Always Pay on Time
This seems like an obvious step, but it always has to be driven home: your credit rating is mainly a reflection of your ability to pay on time. Even if you pay on time for several months in a row, then forget the next month, as a whole you have not succeeded in paying on time, and this will be reflected in your credit rating.
Therefore, it's important to remember not to just pay on time, but to "always" pay on time if your goal is to rebuild your credit. Over time, your good behavior will be rewarded with a better credit rating and more financial peace of mind.
5. Pay Off Balances in Full
Now that you are always paying on time, you might begin to wonder when the payments will ever end. That part is up to you to decide. By making ontime payments over a period of months or years, your end goal should be to pay off your balance in full, rather than just staying afloat at your current debt level.
While your credit score is greatly impacted by whether you pay bills on time, it also factors in the level of debt being reported on your credit report. Generally, the lower your level of debt, the better your credit rating will be. So make it your end goal to pay off your existing balances, and as long as you've made all your payments on or before their due dates, you should see a nice rise in your credit score.
Rebuilding bad credit may seem like a daunting task to undertake by yourself, so you should always consider getting free advice from a credit repair professional (see our list of trusted Credit Repair Services). But by following these five simple steps, you can begin the process yourself and be on your way to a better credit rating int he not-so-distant future.