How to fix and repair bad credit
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Updated 8:09 a.m. UTC Nov. 13, 2023
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Bad credit can hold you back from opportunities and cost you a lot of money in the process. But the good news is that there are actions you can take to fix and repair bad credit if you find yourself in this unfortunate situation.
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What constitutes bad credit?
The definition of bad credit can vary from one lender to another. Each lender or credit card issuer sets its own guidelines that determine what credit scores are high enough to qualify for financing and what credit scores are too low.
However, the two primary credit score developers in the United States — FICO and VantageScore — also set definitions of what constitutes a bad credit score. Credit scores range from 300 to 850. Here’s a look at what credit score developers consider to be “poor” or “very poor” credit scores.
- Poor FICO® Scores: 300-579.
- Poor VantageScore® Scores: 500-600.
- Very Poor VantageScore® Scores: 300-499.
Why fix your credit?
Lenders rely on credit scores to assess risk. A low credit score tells a lender that you’re more likely to make a serious late payment (90 days late or worse) in the next 24 months. This problem could lead to credit denials and more expensive borrowing terms (e.g., higher interest rates and fees) when you qualify for loans and credit cards.
Working to improve your credit score, on the other hand, can make it easier to qualify for the financing you need and has the potential to save you money. It’s possible to save hundreds or even thousands of dollars per year in interest with a good credit score.
Imagine you’re seeking a loan for a $350,000 30-year fixed mortgage with a fair FICO Score of 620. Based on December 2022 interest rate estimates from the myFICO Loan Savings Calculator, you might qualify for an APR of 7.616% and a monthly payment of $2,475. Total interest costs for the 30-year loan would equal $541,040. (Terms can vary.)
Now, let’s assume you had a good FICO Score of 700 instead. The higher credit score might help you qualify for an estimated APR of 6.249% and a monthly payment of $2,155. In this scenario your total interest costs would add up to $425,722.
By working to fix your credit and boosting it an 80 extra points, you could save $320 per month ($3,840 per year) in this scenario. Over the life of the 30-year mortgage, this could save you $115,318 compared to your loan with a fair FICO score.
When should you fix your credit?
It’s wise to make sure your credit is in the best shape possible at all times. Good credit is a valuable asset that could make it easier to qualify for financing, rent a place to live, get lower interest rates and perhaps even save on auto insurance.
However, it’s especially important to fix your credit if you know you plan to apply for a major loan or credit card in the not-so-distant future. If your goal is to purchase a home or a car, for example, it’s critical to fix any credit problems in advance applications for financing.
You should avoid waiting until the last minute to address credit issues as well. Fixing bad credit takes time — often a year or longer depending on the situation (though the process can be faster). So, it’s best to give yourself as much time as possible to work on your credit before you need to rely on it for any financing applications.
How to fix your credit yourself
If you have information on your credit reports that is negative but accurate, it may take time to improve your credit. Federal law (the Fair Credit Reporting Act or FCRA) allows most accurate negative items to remain on your credit report for up to seven years. In the case of a Chapter 7 bankruptcy, it can stay on your credit report for up to 10 years.
However, be aware that negative credit information tends to impact your credit score less over time. A brand new collection account, for example, generally causes more credit score damage than an older one.
You can also study the factors that make up your credit score and see if it’s possible to improve your credit in other ways. For example, even if you can’t erase legitimate late payments from your credit, you might see some credit improvement from paying down your credit card balances and lowering your credit utilization rate.
Of course, it is possible to try to fix credit errors when they occur. The FCRA lets you dispute any credit information you believe to be questionable or inaccurate. When a credit bureau — Equifax, TransUnion, or Experian — receives a dispute, it generally has 30 days to investigate. If the company that provided the information to the credit bureau doesn’t verify the disputed information as accurate, the bureau must delete the item from your credit file.
You can use this free guide from the Consumer Financial Protection Bureau (CFPB) for tips on how to send disputes to the credit reporting companies. The CFPB even provides a free dispute letter template to make the process easier.
How to hire a credit repair agency
The FCRA gives you the right to dispute credit report errors on your own. But some people prefer to outsource the dispute process and hire a professional credit repair company.
Like any industry, there are both reputable companies and bad actors in the credit repair space. So if you decide to hire a credit repair agency, it’s important to take the following steps to protect yourself.
- Beware of any company that demands full payment for services upfront. This practice isn’t allowed under the Credit Repair Organizations Act (CROA). As a result, many credit repair companies charge an initial set up fee (often around $199) and a monthly fee (often ranging from $50 to $199).
- Pay attention to the services each company provides. It’s smart to shop around for the best price for any service. But some credit repair companies that charge lower monthly fees could be more expensive in the long run. Pay attention to the number of monthly disputes a credit repair company will send on your behalf. If a company places a limit on disputes, it might take longer to complete that program compared with another credit repair company that offers unlimited monthly disputes.
- Don’t work with any company that tells you to lie. If a credit repair company advises you to change your identity, lie and say you were a victim of identity theft, or make any other false statements, you should work with someone else.
- Watch out for “guarantees.” Some credit repair companies offer money-back guarantees or warranties that can protect you in certain situations. However, if a credit repair company guarantees deletions, a clean credit report, or specific credit score increases (e.g., 100 points in 30 days), it’s a red flag. Every credit situation is different. And no legitimate credit repair company can promise to remove something from your credit report or raise your credit score.
The Credit Pros
Frequently asked questions (FAQs)
Lenders set their own definitions of a good credit score. According to Experian, one of the major credit bureaus, a FICO® Score between 670 to 739 is considered good and any score of 740 to 850 is either very good or exceptional. VantageScore® credit scores, meanwhile, from 661 to 780 are considered good, and scores of 781 to 850 are excellent.
Everyone has the right to repair their own credit thanks to the Fair Credit Reporting Act. Yet there’s nothing wrong with hiring a professional credit repair company to work on your behalf. If you’re considering working with a credit repair company, make sure the services fit comfortably within your budget. You should also choose a legitimate company that follows the guidelines set forth in the Credit Repair Organizations Act to protect yourself from credit repair scams.
Your credit can impact you in many important ways. Lenders, landlords, insurance providers, utility companies, and even prospective employers might check your credit to evaluate you. Good credit can open doors for you and often save you money. On the other hand, credit problems can hold you back or cost you more when you do qualify for financing and services.
Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.
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