Having a bad credit score sometimes feels like the end of the world, but I am here to tell you it’s not! We all make mistakes at one point or another. The great news is that your credit score can be fixed. When you became aware of the mistake you made, you may have felt lost, unsure of where to start or even defeated. Perspective is key in life and especially when it comes to your financial well-being. See your mistakes as a lesson, an opportunity for you to reevaluate and rebuild. Do you remember learning how to ride a bike and how many times you fell? Did you stop trying because you fell? No, you got back on the bike and kept peddling until you were able to balance. Credit works the same way, your score can fall, but there is always room for improvement; you just have to research, create a plan and remain consistent. Understanding credit and how it works is important. If you are unsure of how something works, how could you possibly use it? When you buy electronics or appliances, you read the manual, and the same applies to how to use your credit. Below I have listed 12 steps to help you repair your credit and get on back on track.
1. Before tackling credit repayment, you will need to devise a plan to figure out how much money you are able to set aside for monthly debt repayment. First, write down your monthly income and expenses (fixed-no fluctuation and variable-fluctuates in amount or frequency). Next, subtract your total expenses from your income. The remaining amount is what you’ll be able to designate towards debt repayment. However, if your expenses are more than your monthly income, you will need to revise them by eliminating unnecessary purchases or find a way to make additional income. I recommend that you do the former. Living below your means will be beneficial to you in the long run. This type of financial discipline could help you achieve your goals, whatever they may be, in a shorter timeframe.
Sidebar, if you listed Netflix, Amazon Prime or any other subscription service as an expense, please consider canceling it or sharing the cost with family or friends. Please note that things like subscriptions and eating out are nonessential WANTS, not NEEDS.
If you want to get a second job or start a side hustle, there are several side hustles that you can start with little to money.
2. Once you figure out how much money you have left, pull your credit report. Create an account for both
Transunion and Equifax if you don’t already have one. I recommend both because the reporting centers do not communicate with each other, and lenders have been known not to report to both. Both bureaus update your report once a month.
You can also create a free account on Credit Karma and Borrowell to see your credit report. They update your credit report on a weekly basis. Although these sites are great because they are free, it is better that you go to the source (Transunion and Equifax) when it comes repairing and improving your credit.
3. Write down your current score from both companies for reference purposes.
4. Go through your report lender by lender and see what is still outstanding and what, if anything, has gone to collections. Check the year each item was reported. Negative information reported to the bureau have expiry dates. You can find a list of expiry dates for negative impacts in my Credit DIY guide.
5. If any information has passed its expiry date, call the reporting bureaus and request it be removed. Then,
write out the total amount owing.
6. Check if any mistakes have been reported on your file. In some instances, it could be a mistaken identity.
Be very diligent if you have a common name. Lenders and credit bureaus have been known to report incorrect information. If you do find something, call and get it removed right away.
7. If any late payments are showing on your report, call the companies and ask if the most recent late payment can be removed from your report. Some companies will remove late payments. Others won’t, but it doesn’t hurt to try. Once that is all cleared up, automate your bills and set reminders on your phone a few days before the bill to make sure you have the money in your account for the bill.
8. If you have money saved or money you can borrow (without placing yourself further in debt, i.e. a payday
loan) to pay off some of your outstanding debt in full, use that money to do so. You may be saying I’m already in debt; why in the world am I taking on more debt? If something is negatively impacting your score, we want to remove it immediately, or if it’s a high-interest loan, you want to be able to reduce that interest as much as possible while you are trying to repay it. That can be an option if you can borrow money from a friend, family member, or an institution (private lender) with a lower interest rate.
9. If you can’t pay off the debt in lump sums, start by chipping away at it little by little. Pay off your lowest
balance cards first, and when a card is paid off, divide whatever you were paying each month to your other
cards. Then, you can pay down more debt without additional income. This is called the snowball effect; one small action can trigger a greater reaction.
10. If you have anything outstanding that is 90 days or younger, pay the balance and get those out of the way as soon as possible, as you don’t want to add more insult to injury.
11. Call each company and ask to set up a payment arrangement. They will usually say yes because they want to receive as much of the original sum as possible.
12. If the bill has already gone to collections, the original lender has sold your debt. While it certainly isn’t a good thing, it isn’t the worst. Collection agencies buy your bad debt from companies at a fraction of the cost
and then chase you down to try and recover as much as possible. This means that you have room to negotiate. Call the collection agency and try to do one of two things:
First, you can either a) set up a payment arrangement or b) negotiate to pay a lesser amount if you pay in one sum. It is always best to negotiate it down and pay one lump sum if possible. They usually give up to 30 days to pay the total negotiated amount. Once the debt is paid, get the collection agency to send you a letter and email, if possible, showing that you paid your collection. Some companies will send it to the major credit bureaus for you, but you can also get the letter and send it yourself. When you send in the letter to the credit bureau, request to have your score updated. The above-mentioned actions show lenders that you’re taking control of your old bad debt and that you’re responsible enough to try and build your credit back up.
There are tools like KOHO’s Credit Builder, which costs $7 a month for 6 months and offers an interesting
approach to reporting payments to credit bureaus on your behalf to help repair your credit. Once you address the past, you can deal with the present for a better future. After creating and implementing an action plan to clear and reduce your debt, you can focus on rebuilding your score. But, before you apply for credit, wait until the negative information has fallen off of your report before reestablishing your credit
Dean Chambers, your wealth coach