Posted by: John S Kiernan

Credit scores have many enemies — from late payments and collections accounts to tax liens and court judgments. Each takes a toll on your credit standing to varying degrees. And the damage unfortunately comes far faster than any resulting recovery.

There is no such thing as a quick fix to serious credit-score problems, you see. There are only four legitimate ways to fix or repair your credit, and they’re all free.

We’ll explain each of the four pillars of credit repair in detail below. Just remember, each step on its own will not be enough to completely fix your credit. Credit repair, after all, is like peeling an onion: You have to peel away a few layers before you get to the good stuff. But we’ll try our best to make sure your credit recovery doesn’t bring you to tears.

Step 1: Dispute Credit-Report Inaccuracies

Roughly one in five people have an error on one of their credit reports, according to the Federal Trade Commission. And the wrong error could knock you into a lower credit tier, forcing you to accept less attractive financial products and generally spend more than necessary.

So parsing all three of your major reports and disputing any mistakes that you find could produce fairly immediate credit-score gains. The best part is that disputing credit report errors is easy enough for anyone to do on his or her own.

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If you’re not comfortable navigating the credit-repair process on your own, you can seek help from a nonprofit credit counselor or a select few for-profit companies. Lexington Law is among the for-profit consultancies that have successfully helped people remove negative items from their credit reports.

Basically, the trick is to aggressively dispute negative records, especially older ones, and force the source of that information (otherwise known as “data furnishers”) to produce verifying documentation. A lot of times, the so-called data furnishers can’t, which obligates them to stop reporting the negative item to the credit bureaus and thus removed from the consumer’s file.

Negative records that you cannot successfully dispute will remain on your credit reports for roughly seven to 10 years. The best way to overcome such negatives is to add a pile of new positive information to your credit reports. Doing so dilutes the negative information and shows that you’re really a responsible borrower who just made a few mistakes. We’ll explain how to go about doing that in the steps below.

Step 2: Piggyback on Excellent Credit as an Authorized User

If one of your family members has good or excellent credit, ask to become an authorized user on one of their credit reports. As an authorized user, your relative’s account will be added to your credit reports. And as on-time payments are made, the resulting positive information will help to lessen the impact of your past mistakes. That will lead to credit-score improvement.

In other words, you can basically hitch a ride to better credit.

Plus, it’s worth noting that authorized users can’t be held responsible for missed due dates or other misuse of the account. So if your relative screws up, you can simply ask the credit bureaus reporting the information to scrub the records from your file.

As a result, there is very little downside to being an authorized user. And there’s a lot of upside potential, considering that it’s possible to build excellent credit with authorized use alone.

Step 3: Satisfy Collections Accounts & Delinquencies

The newest credit-scoring models stop considering collection accounts once they’ve been paid. In other words, figuring out a way to repay what you owe — or negotiating a deal with your creditor — can produce immediate credit-score benefits if you have a collection account, medical or otherwise, on your file.

This alone probably won’t repair your credit completely. But every layer of negative information that you can strip from your credit report will improve your credit score.

Similarly, catching up on payments for a delinquent account won’t repair your credit. But it will prevent the damage from worsening. More specifically, finding a way to change the status of a delinquent account from “past due” to “paid” or “settled” will stop the bleeding and allow you to proceed with your repair efforts.

Step 4: Reduce the Amount of Credit You Use

Credit utilization is the ratio of your account balance to your spending limit. It basically indicates whether you are using too much credit, which, for the purpose of maintaining good or excellent credit, is generally above 30% of what’s available. The ratio is calculated for each of your credit cards individually as well as for all of them collectively. The lower your credit utilization ratio(s), the better it generally is for your overall credit score.

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So how do you improve your credit utilization in the name of short-term credit-score gains? The easiest way is to pay early and often.

Paying your outstanding balance a few days after you receive your paycheck, rather than waiting until your due date, will help minimize the balance that’s reported to the credit bureaus and used to calculate your credit utilization. This can work both with multiple monthly payments or a carefully timed single payment. Automating withdrawals from a bank account is a great way to enforce the plan and eliminate forgetfulness.

Extra Credit: Monitor & Perfect

Keep a close eye on your credit score throughout the repair process, as its daily changes will serve as an indication of your progress. You can do so for free on WalletHub, the only site with free daily credit-score updates. We’ll also analyze your latest credit score to identify weaknesses and tell you how to improve.

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For more information, check out WalletHub’s top tips for everyday credit improvement. And if you’re dealing with really significant damage, you might also want to check out our guide on how to rebuild your credit completely.

Ask the Experts: Getting a Fix on Fixing Credit

Fixing damaged credit can be a very daunting task. So we called in reinforcements. We posed the following credit-repair questions to a panel of personal finance experts. You can see who they are and what they had to say, below.

• What is the biggest mistake that people make when trying to fix damaged credit?
• When you have damaged credit, does it ever make sense to pay for help fixing it?
• Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation?
• What is the best tip you have for someone trying to fix their credit?

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• Anthony B. Sanders Distinguished Professor of Real Estate Finance in the School of Business at George Mason University
• Richard Price Associate Professor of Accounting in the Price College of Business at the University of Oklahoma
• Andrew Whitman Professor of Insurance in the Carlson School of Management at the University of Minnesota
• Ali Besharat Assistant Professor of Marketing and Co-Director of the Consumer Insights and Business Innovation Center in the Daniels College of Business at the University of Denver
• Coleen Pantalone Associate Professor of Finance at the D’Amore-McKim School of Business at Northeastern University
• Brad Klontz Associate Professor of Practice in the Heider College of Business at Creighton University
• Kristy L. Archuleta Editor of the Journal of Financial Therapy and Associate Professor in the Personal Financial Planning Program in the School of Family Studies and Human Services at Kansas State University

Anthony B. Sanders Distinguished Professor of Real Estate Finance in the School of Business at George Mason University What is the biggest mistake that people make when trying to fix damaged credit? The biggest mistake people make is not checking their credit scores in the first place, and failing to challenge false claims, if they exist. When you have damaged credit, does it ever make sense to pay for help fixing it? The answer is no. There is plenty of free online help on how to repair damaged credit. The simplest way? Stop taking out new debt and make sure you make timely payments on existing debt. Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation? It makes sense to dispute inaccurate negative records, but not to dispute accurate ones. This is similar to challenging a home foreclosure after you failed to make three or more payments due because the lender doesn't have the necessary documents. Either you missed the payments, or you didn't. What is the best tip you have for someone trying to fix their credit? It is important for consumers to know that there are credit scores for home loans, one for auto loans and that they are likely different from the "free" credit reports that can be obtained online. And people should know that even if you make timely debt payments, too much debt is a cause for a reduction in your credit score. Pay down some existing debt first before taking on additional debt obligations. Richard Price Associate Professor of Accounting in the Price College of Business at the University of Oklahoma When you have damaged credit, does it ever make sense to pay for help fixing it? It is worth seeking help if you lack the knowledge. There are free resources, but to get individualized attention, it could be worth the money. What is the best tip you have for someone trying to fix their credit? Get your spending under control. It is likely necessary to make dramatic changes in the way you live. You may have to move or get a cheaper car. You have to get to a point where you are spending less than you earn, and not relying on credit. Andrew Whitman Professor of Insurance in the Carlson School of Management at the University of Minnesota What is the biggest mistake that people make when trying to fix damaged credit? They do not document communications with merchants, landlords in writing -- emails, faxes can be used in court and to send to credit agencies and creditors to prove their case. They reply on phone conversations which cannot prove their case. When you have damaged credit, does it ever make sense to pay for help fixing it? No. There are agencies and help centers which do not charge. What is the best tip you have for someone trying to fix their credit? Don't borrow, pay a little by check, appeal medial bills if there's a threat to send to collections, cut spending, pay with cash when you can. Ali Besharat Assistant Professor of Marketing and Co-Director of the Consumer Insights and Business Innovation Center in the Daniels College of Business at the University of Denver What is the biggest mistake that people make when trying to fix damaged credit? There are three major mistakes that people make when they attempt to fix their credit score. First, people tend to dispute everything on their credit report. In fact, some positive accounts could help improve your credit rating, and disputing them could reduce your credit score. Second, many people decide to close a credit card without knowing that a credit card could increase their credit score, especially if it has a balance or a long history. In general, closing a credit card will not improve your credit score. Third, people choose to skip some payments in favor of others. If you want your credit to improve, you should not miss payments, or at least ensure you have the met the monthly minimum payment. If you do so, your credit score will continue to drop. When you have damaged credit, does it ever make sense to pay for help fixing it? Consumers who are struggling to fix their credit score should consult only with professional and reputable agencies. Credit repair organizations are governed by a federal law known as the Credit Repair Organizations Act, which requires them to fulfill certain obligations. An honest and transparent credit repair company will closely review your credit history and inspect your credit reports before discussing the options. Unfortunately, however, the credit repair industry is full of scammers. They usually don’t provide a copy of the contract before asking you to sign it. Thus, you must know the amount being charged (the law prohibits credit repair companies from charging upfront fees), details about the services (they cannot tell you how much your credit will improve), and the date by which the services will be offered. What is the best tip you have for someone trying to fix their credit? The best advice for rebuilding credit is to manage it responsibly over time. It takes time, and there is no quick way to fix a credit score; here are a few steps that you can follow:

• First, request a free copy of your credit report annually and check for errors, as your credit score is calculated based on this report. In particular, you should ensure there are no late payments incorrectly listed, and the amounts owed are reflected correctly.

• Second, think strategically about paying down your debt. The total amount owed contributes 30% to your credit score's calculation, and is easier to clean up than payment history (although it contributes 35% to the score calculation, past problems like missed or late payments are not usually fixable).

• Third, keep balances low across credit cards, as high outstanding debt can affect a credit score.

• Finally, pay off debt rather than transferring it to other cards. As noted earlier, owing the same amount but having fewer open accounts may lower your score.

Coleen Pantalone Associate Professor of Finance at the D’Amore-McKim School of Business at Northeastern University What is the biggest mistake that people make when trying to fix damaged credit? The biggest mistake that people make is to wait. Fixing damaged credit is hard work and it takes time and commitment. Because it can feel overwhelming, there is a tendency to put your head in the sand and hope it will just go away. It doesn’t. So, get your budget under control, cut up credit cards, and begin to chip away at the debt. At the same time, talk to your creditors. If you can, work out a payment plan with each of them. But make sure you can do what you promise. When you have damaged credit, does it ever make sense to pay for help fixing it? There are free resources that can help you address your credit problems -- developing and sticking to a budget, negotiating with creditors, and starting the process of paying off debt. Churches and community agencies are good starting places for help. Paying for help is tricky. There are plenty of unscrupulous people out there offering to help you fix your problem for a fee. As with anything, if it sounds too good to be true, it probably is. There is no magic bullet for fixing a credit problem. So, look for the free resources in your town. Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation? It might help, but the time and energy is probably better spent addressing the underlying problem -- that you have too much debt. What is the best tip you have for someone trying to fix their credit? The most important tip is “don’t wait -- start now.” Credit problems don’t go away, and they don’t fix themselves. Brad Klontz Associate Professor of Practice in the Heider College of Business at Creighton University What is the best tip you have for someone trying to fix their credit? While repairing your credit is important, it is not enough. You must take an honest look at your beliefs and behaviors around money. Take 100% responsibility for your role in your credit difficulties, and institute new beliefs, behaviors and supports that will ensure you do not find yourself in trouble again. Kristy L. Archuleta Editor of the Journal of Financial Therapy and Associate Professor in the Personal Financial Planning Program in the School of Family Studies and Human Services at Kansas State University What is the biggest mistake that people make when trying to fix damaged credit? They pay too much to fix credit that they could have fixed on their own because they do not know that they can do much of what a professional can do. If a professional is needed, seek out services from a not-for-profit agency that is accredited by National Foundation of Credit Counseling. Another good idea would be to look for a professional who is an Accredited Financial Counselor(R). When you have damaged credit, does it ever make sense to pay for help fixing it? It may, if you seek the right resources. This can be an overwhelming process and a trained professional, who works in your best interest and not on commission or by selling a product to fix the problem, may be the best solution. What is the best tip you have for someone trying to fix their credit? Credit has become an important aspect of our lives and communicates a story about ourselves. Improving credit or fixing credit is important in many aspects, whether it is setting up utilities, renting a home, purchasing a home or obtaining a job. If your credit is in need of repair, know that you are not alone. Don't be afraid to seek help when things become overwhelming. There are qualified financial professionals who trained to help, and who will work in your best interest.

 

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