How Do I Make My Bad Credit Good?

There is no easy fix for having bad credit. It takes time to create a bad credit history, and it takes time to create a good one. But do not despair! With a bit of patience and a thought-out plan, it is indeed possible to turn your credit around.

This process requires us to focus on two separate issues: (1) Repairing credit, and (2) Rebuilding credit.

This two-pronged process can be summarized by a phrase in the old Johnny Mercer song, “You Got To Accentuate The Positive And Eliminate The Negative.” This is the essence of reestablishing credit. Our credit report must show a presence of positive items and an absence of negative items.

For our purposes today, we will need to reverse the order by first eliminating the negative and then accentuating the positive.

The goal is to pinpoint any bad credit marks in your past (7-10 years) that might well be lowering your credit score. Remember, good credit scores are more like bowling than golf, the higher the number the better.

You begin by ordering your credit report. At “www.AnnualCreditReport.com,” you can order a report from all three credit bureaus once a year for free. Or you can order one for a small cost from MyFico.com, TransUnion.com, Experian.com, or Equifax.com. There may be an additional cost to order your credit score. A loan officer at your bank or credit union can explain your report to you if you need help.

1. Discover. List any bad credit marks that appear on your report. The report will show when the debt was created, to whom it is owed, and when it will drop off your report. Bad marks normally drop off your credit report seven years from the date they were added. If a debt is scheduled to fall off your report in a matter of months, it may be wise to let it drop off instead of paying it.

2. Dispute. Any item may be disputed if it is inaccurate. Directions for disputing information usually appear near the end of the report. List the reasons why you feel it is inaccurate. Say more than, “I don’t owe this!”

The creditor is given 45 days to validate his claim, and if he cannot, the item is removed from your credit record.

3. Deal. You may want to see if the creditor is willing to “settle” the account for a portion of what is owed. Settlements normally range from 25%-85% depending upon the age, amount, and type of debt. A settlement will report a zero balance on your record with a notation that shows the debt was settled, not paid in full.

Before sending any money, get all agreements in writing and keep accurate records, then check your credit report again in three months to make sure the settlement was reported properly.

4. Disburse. Some debts may require paying the balance in full with one payment or a payment plan. Keep accurate written records of all agreements. Paid debts will report a zero balance with the notation “paid in full.” Paying a debt in full is better for your credit score, but if enough money can be saved, a settlement is wise.

Eliminating the negative is only half the work to be done to order to reestablish one’s credit. Lenders want to see, not only an absence of bad items, but also the presence of good items.

A credit card is an excellent tool to accomplish this. It provides a record that you are now using credit in a responsible manner. If you are denied a normal credit card, ask your bank or credit union about a “secured” card. A secured card requires a cash deposit that then becomes the credit line for the card. The issuer holds your money deposit as security against your charges. A secured card normally requires at least a $250 deposit.

Do not worry about the interest rate on this card. Since you are going to pay off the balance in full each month, there will be no finance charges.

The only purpose for this credit card is to establish a new track record showing that you make your payments on time.

1. Put charges on. Once a month charge some small item to your card. Charge only what you have the cash to pay for in full. Building good credit is not dependent on the amount you charge, only on paying the bill on time.

2. Pay charges off. When you receive the monthly statement, write out a check for the entire balance. You do not need to carry a debt balance in order to establish good credit. Again, the point you are making is that you are paying your debts on time. That does not require having debt that costs you additional monies to maintain.

I once counseled a woman who was advised to purchase a house in order to rebuild her credit (she listened!). Creating good credit does not require us to have large debt and pay interest charges. It only requires us to make our payments on time.

Therefore, I am not promoting going into debt and paying finance charges! I am promoting using a credit card for the purpose of making a positive track record.

This process of eliminating bad history and creating good history will take a minimum of 9-12 months before you begin to see any changes in your credit score. You are shooting for a credit score of at least 720 because that is where the best terms are found.

If you are patient, this plan will work! Repair your credit by eliminating the negative, and rebuild your credit by accentuating the positive.

Now, go out and get started on creating a new chapter in your life. One that shows you repay your debts in a timely manner.