Can I Repair My Bad Credit?

Nothing in the world of consumer credit reporting is forever. You can and should repair your bad credit as soon as possible, because you never know when you might need to apply for credit and someone might run a credit check on you. While some causes of bad credit go away on their own eventually, you can boost your score several dozen points with immediate action.

Identification

The Fair Credit Reporting Act authorizes consumers to dispute mistakes on their credit report that bring down their credit score, such as payments with an incorrect posting date. The rest of the credit repair process depends on the federal credit reporting time limits -- most items have a seven-year reporting limit, except extremely bad items like bankruptcy -- and the borrower repaying debt with on-time payments.

How Is it Done?

The FTC suggests that consumers repair credit on their own, because credit repair companies cannot fix most of the problems that usually cause bad credit. If you constantly miss making at least minimum payments, for example, you must control your spending and pay attention to the due date on bills. A good start is to look at the factors in the FICO credit score -- most lenders use the FICO scoring model. Debt amount and payment history count the most in the scoring formula, so funneling money toward outstanding balances and paying on time should be priorities.

Closing Accounts

Closing accounts does not help a credit score, because you lose some of your overall credit limit when you do. When you have a lower credit limit, your existing debt takes up a larger percentage of your total credit limit across all cards that you use. This ratio of debt to available credit is called credit utilization. Credit utilization is a significant part of the "amount owed" component of the credit score -- the exact weight of this is unknown in the FICO model.

Tip

If you need outside help in repairing your bad credit, look for a credit counselor from a nonprofit agency, such as the National Federation for Credit Counseling, suggests the FTC. Counselors can offer advice specific to your credit profile and negotiate with creditors, which might result in a lower interest rate or monthly payment. A good counselor will go through every option available as well as help you set a budget and teach you money management skills.

References

• MSN Money Central; 9 Fast Fixes for your Credit Scores; Liz Pulliam Weston; December 2010
• Federal Trade Commission; Credit Repair: How to DIY and Avoid a Scam; May 2009
• MyFICO.com: What's in Your FICO® Score
• Bankrate.com; 5 Steps to Do-it-Yourself Credit Repair; Dani Arthur; July 2008
• Federal Trade Commission; Fiscal Fitness: Choosing a Credit Counselor; February 2011