If you have bad credit, you might feel like doors are constantly being closed on you. It could lead to difficulty being approved for an apartment, paying higher insurance premiums, being denied a job, or being denied for a loan.
Credit scores reflect your payment patterns over time and almost all major lenders use them. Your credit indicates to people how trustworthy you are, and indicates to lenders how likely you are to pay back your loan.
Borrowers can be denied a loan if they have a low credit score because the risk is higher that they won’t be able to pay back their loan. Your credit score can also determine what types of loans you will have access to and the rate of interest that you will pay. Borrowers with lower credit scores typically pay more in interest than those with a higher credit score. This is because they’re riskier to lend to and therefore the lender must offset the higher default rate.
Because credit scores place a greater emphasis on your most recent payment history, it is possible to gradually raise a low score over time. Even if your credit isn’t bad, there are still benefits to increasing your credit score. It’s important to know that there is no quick fix when it comes to improving your credit score. It will take time and diligence, but with patience and a plan you can eventually obtain a good credit score.
If you have negative information on your credit report, it can take a long time for it to go away. Here’s how long negative information stays on your credit report:
• Late Payments: 7 years from the late payment date
• Foreclosures: 7 years
• Collection Accounts: 7 years and 180 days from the date of delinquency on the original debt
• Short Sales: 7 years
• Bankruptcies: 10 years from the filing date; 7 years for Chapter 13 cases
• Repossessions: 7 years
• Judgments: If the judgment has been paid, 7 years. If unpaid, potentially longer
• Tax Liens: 7 years after they are paid
Only time can fix these blemishes. That’s why moving forward, it’s critical that you make all payments on time.
Here are some tips to rebuild your credit:
- Check your credit report and credit scores. By law, you are entitled to three free copies of your credit report. Scour your credit score and make sure all the information is accurate. If you spot a mistake on your credit report, you should report it immediately. Under the Fair Credit Reporting Act, credit reporting companies are obligated to fix any mistakes on your report. To report the mistake, you must submit any inaccuracies in writing to each credit bureau. You’ll need to clearly identify the issue in writing, and supply documents that support your position.
- Make all payments on time. Perhaps the most important step to rebuilding your credit is to make all your payments on time. Because payment history is the basis for the majority of your credit score, it is critical that all bills are paid on time.
- Keep credit card balances low. Your credit utilization is important, and keeping your balance low shows lenders that you can responsibility manage your credit without spending beyond your means. If you’re spending nearly all of your available credit, it may appear that you’re in financial trouble. Because of this, credit experts recommend that you only use 30 percent of your available credit.
- Protect Existing Credit. Don’t close existing accounts in hopes that it will disappear from your credit report or higher your score. If you’ve had financial trouble in the past, your first inclination might be to take a scissor to your credit cards and vow to never use them again. But older accounts are good for credit score, so instead of closing an account, keep your utilization low and pay bills on time.
- Create positive credit history. Although you may be denied some forms of credit because of bad credit history, it is possible to open a new form of credit that could help build your score. One option is to ask a family member or friend to co-sign for a credit card or car loan. Another option is to apply for a secured credit card. Secured credit cards require cash collateral that will serve as security for your line of credit.