Repair Your Credit Score

• Step 1 Know why a good credit score matters

  Three major credit reference agencies — Experian, Equifax and TransUnion — compile your credit score, gleaned from reports from credit card companies and lenders, to determine what type of credit risk you are.

  Lenders use credit scores as a guide to determine if someone gets a loan, the loan's interest rate and the loan amount.

  An excellent credit score means you can get the best interest rates and most favorable terms for loans and purchases. A lower credit score means you might not qualify for a credit card or a home, auto or business loan. Or if you do, it may be at a much higher interest rate for a smaller amount.

  Other companies, such as cell phone companies, insurance companies, landlords and government agencies, use credit scores to determine if you qualify for especially good offers or programs. Some employers may even check your credit scores.

• Step 2 Check your credit score online

  You can check your credit score for free in just a few minutes. Search online for "free credit report," then choose carefully. Some websites say they're free then ask you to pay. Depending on the website, you can check your credit report at one of the three credit agencies or all three.

  The first time you check your credit report, check all three agencies: Experian, Equifax, and TransUnion. Each may have a slightly different score for you, and in some cases the point spread may be as much as 50 points.

  Nearly all credit history past 7 years disappears from your credit report. If you declare bankruptcy, it stays on your credit score for 10 years. However, in some cases, you might get credit more easily after a bankruptcy.

• Step 3 Interpret your score

  800 or more (Excellent). You're eligible for the lowest interest rates and best terms available to most consumers.

  700 to 799 (Very good). Some lenders offer a still-better rate for 720 to 740, so it's smart to know your score before you apply for a loan so you can discuss it with your lender.

  680 to 699 (Good). You shouldn't have difficulty obtaining credit. Terms will be reasonable, though not as good as they would be with a better credit rating.

  620 to 679 (Okay). You won't be denied credit, but the terms won't be particularly good. At this level, you need to take steps to repair your credit rating.

  580 to 619 (Low). You'll probably get a loan, but on terms that might be difficult. The loans you do qualify for will probably include high commissions to the broker because you've been labeled a higher risk.

  500 to 580 (Bad). You might not get a loan and the terms may be so unfavorable you won't want to accept them. It's important to take steps to restore your credit rating, and visiting a reputable credit counseling service is advisable.

  Below 499 (Must repair credit). The only loans you're likely to qualify for are the payday and other types of loans that have interest rates and terms tso high they're not advised. Take steps to repair your credit rating and meet with a reputable credit counseling service.

• Step 4 Make credit score corrections

  Correct any black marks against your credit score that you feel are unfair or were due to extenuating circumstances. Perhaps you got a new credit card and the first mailing got messed up — or you didn't recognize the envelope — so you missed your first payment. Or maybe there was a dispute about your phone bill, and the phone company reported it as a past-due payment.

  To get an error or unfair listing fixed, contact the credit bureau that listed it. Usually, the website includes a mailing address or directions for disputing unfair black marks right online. Explain in as much detail as possible, with dates and specifics such as check numbers. Also include copies of any documentation you may have.

• Step 5 Pay down credit cards

  Credit cards are one of the most closely examined types of financial information by credit agencies. Look your best to the credit agencies by doing the following:

  • Pay on time, even if it's just the minimum payment. (You can always make a second payment later in the month.)
  • Try to get down to just one card so you can watch it like a hawk and make sure you stay up on payments. If you have multiple cards, with multiple payment due dates, you're more likely to miss payments and you're vulnerable to paying multiple late fees, which could cost you hundreds each month.
  • Lower your total credit card debt. Credit agencies like to see balances at least 30 percent lower than the limit on each card.
  • Speed paying off credit cards by dealing with the lowest interest rates possible. Shop around online for a lower-interest card. Check how much a balance transfer costs, though, to make sure it's worth that expense.
  • Pay off your highest-interest rate cards first.

• Step 6 Pay bills on time and reduce your debt load

  Besides credit card history, credit agencies look closely at your mortgage and second mortgage payment history. As much as you are able, stay on top of those payments.

  Credit agencies also look closely at car payments, so pay those on time as much as you can.

• Step 7 Stay on top of your credit report

  When you first start working to improve your credit score, check your score every two to four months. You can sign up for free email alerts when your credit score has changed.

  After that, check your credit score twice a year to remain aware of any changes. If it's getting better, you'll see a reward for your efforts. If it's getting worse, it's a reminder to be more diligent.

• Step 8 Give it time

  Some steps you take to improve your credit score show results within a few weeks, but some measures may take a year to 18 months to reflect on your credit score.

  Be patient and stay the course. Remember: it took you years to arrive at your current score, so you shouldn’t expect it to change drastically overnight.

RELATED QUESTIONS