By Paula Pant, WiserAdvisor contributor
Trying to buy or rent a home? Looking for your next car? Thinking of enrolling in graduate school?
A poor credit score can hurt your chances of success, whether you're looking for private student loans or shopping for your next set of wheels. But if your credit score is already in the 600's or below, there's good news: you can fix bad credit.
Credit repair is like losing weight: It doesn't work overnight, but if you're consistent and dedicated, you'll start to see results. Here's how:
1. Pull Your Credit Report
First, make sure your credit history doesn't contain any errors. You can get a free copy of your credit report every year from the three main reporting agencies, Equifax, Experian and TransUnion, by heading to annualcreditreport.com.
Once you've got your report, check it over carefully to make sure there aren't any mistakes. Are the balances listed for your accounts correct? Do you see any late payments you don't recognize? If anything looks amiss to you, you should open up a dispute with the reporting agency to correct it.
2. Get on Top of Your Payments
Your credit score reflects your ability to keep up with payments, so setting yourself up for success here is key. Put reminders on your calendar or set up automatic payments online so you minimize the risk of accidentally making a late payment. Of course, if you have any currently overdue bills, take care of them pronto. You'll get negatively dinged for paying late, but you'll get dinged even further if your payment is more than 30, 60, 90 or 120 days late, successively.
3. Stop Adding to Your Debt
Take the cards out of your wallet, cut them up (or freeze them in a block of ice), and refrain from applying for any new credit lines. Adding to your debt while attempting to repair it is self-defeating.
It's time to find other ways -- besides debt -- to pay for the things you need. You may need to slash your budget for a while. You may need to take on a second job. Do whatever is required to stop the cycle of debt.
4. Pay Down Your Balances
A high "debt utilization ratio" (a measure of your debt, relative to your credit availability) can lower your credit score. So come up with a plan to start paying down those balances.
There are several popular debt-payoff methods. The "debt snowball" method advocates paying off the loan with the lowest balance first, so that you can feel the psychological victory of crossing one of your accounts off your list. The "debt stacking" method supports paying off the highest-interest-rate loan first, which mathematically saves you the most money in interest payments. Choose whichever method works for you, and follow it diligently. After all, the best debt-payoff strategy is the one that you'll stick to.
No matter what, do NOT play the balance transfer game where you just move debt from one card to another. This won't pay down your debt; it'll just move the debt around.
5. Don't Rush to Close Accounts
You may think that closing off any accounts you've paid off will help your credit score, but that's a mistake.
The length of your account history factors into your credit score: The longer your accounts have existed, the better. Older lines of credit reflect more favorably than new lines. Keep that department store credit line you opened 10 years ago, because it counts positively toward your credit score.
You don't need to use the account; you just need to leave it open. Feel free to cut up your credit card, while still leaving the account (technically) open.
6. Establish Good Credit
What if your problem isn't necessarily bad credit -- it's no credit?
Strategically open up a new line of credit. Getting a secured credit card or gas credit card is easier than getting a traditional credit card when you've got zero credit, and by making small charges each month and paying the bill in full, you can build a history of smart credit usage that will boost your score.
Note: This does not go against point #3 because you will be regularly paying off these balances, in full, each month. Never charge more on these cards than you'd pay in cash each month -- in other words, if your monthly budget for gas is $100, charge only $100 and no more.
If you want to play-it-safe, place a small recurring bill (like your $5 per month Netflix subscription) onto this credit card, and set up an automatic payment so that there's no risk that you'll forget to mail your check.
7. Negotiate with Your Creditors
This works more often than you may think.
Yes, credit card companies are huge and you can spend lots of time on hold waiting to talk to an actual human, but they want your business (read: your money), and many of them are willing to negotiate with you in order to keep it.
If you're having trouble paying down your cards and need help, call customer service and ask to speak to someone about a settlement arrangement. The company may be willing to lower your interest rate or hold late charges as long as you make regular payments each month.
If you've had one or two late payments on an account due to unforeseen circumstances, like losing your job, you can send a letter requesting a "goodwill adjustment" to your account. Briefly state which charges you'd like removed and how you've been a good customer apart from those instances. (Note: This strategy works best by mail, as phone reps don't always have the authority to grant you these adjustments.)
