How to Repair Your Credit the Right Way

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Whether you’ve had a major financial breakdown and would like to begin the process of starting over, or you let one too many late payments slip through and have damaged your credit standing, rebuilding your credit is not only possible, it’s necessary. Without good credit, you may be turned down for loans or have trouble with ever-increasing credit card rates. So what can you do?

How to Repair Credit Tip #1: Be in the Know. You can’t fix a problem if you don’t know how bad it is. Get your credit score and a copy of your credit report from all three of the major credit reporting bureaus. Look over the information affecting your scores. If any of the scores seem dramatically different than the other two, an error on that report may be holding you back. If they are generally the same, take note if late payments are the culprit. Or maybe your debt-to-income ratio has tanked your score. Knowing the problem is critical to solving the problem.

How to Repair Credit Tip #2: Dispute Any Errors. After a close examination of your credit report, sometimes an error may be found. Bring this to the attention of the credit reporting bureau by sending them a letter describing the error or filling out their online dispute form. If you have supporting documentation, make copies and provide that with your dispute. The credit reporting bureau then has 30 days to confirm the disputed entry, and without confirmation, they are required to delete the error.

However, sometimes the bad stuff is true, but that doesn’t mean a little diligence can’t go a long way in making things better.

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If it is simply an unpaid bill, pay it or contact the creditor to set up a payment plan. If you have a dispute with a creditor, you can add a note to your credit report explaining your side of the situation. In either case, in time, even the worst items fall off your credit report and the older the blemish gets, the less impact it will have on your credit provided you continue to add new, positive payment behaviors to your credit reports.

How to Repair Credit Tip #3: Automate Good Behavior. What it takes to have a good credit report and score is doing the right things consistently and over long periods of time. Some of the things you need to do can be done automatically—like paying your bills on time. Use your bank’s auto-pay feature and enlist the help of apps like PageOnce to help you remember when your bills are due so you can make sure to have money in your account to cover them. However, if the underlying problem is overspending and you don’t have money, brainstorm solutions. Create a budget that doesn’t deprive you, but still allows you to meet all your financial obligations. Or, look at taking on a second job to help meet your financial goals.

How to Repair Credit Tip #4: Pay Down Debt. The rule of thumb: Your debt, not including rent or mortgages, should be no more than 20 percent of your monthly take-home pay. And, if you’re carrying credit card debt, it could be holding your credit score down. In this case, you should aim to keep your balances at 10 percent of your available credit limits to maximize your credit score in the debt category. If you’re carrying more than you should, the solution is easy: start paying it off. Attack it, really.

There are lots of plans out there for paying down debt. You can organize your debt from the biggest amount to the smallest, and pay off the small ones first to see immediate results, working your way up to the big ones. Or, you can organize them by interest rates, and pay off the bigger interest rates first to make sure you’re saving the most amount of money. Whichever plan inspires you the most is the one you should go with. And then, try and get a head start with a big amount—hold a garage sale, or sell that guitar collecting dust in the corner, or write articles for a personal finance Web site. Whatever you do, apply that cash to your debt and see it shrink before your eyes.

One caveat: Just because the balance on your credit card is lower, doesn’t mean you can buy more. Financial freedom isn’t tricky, but it does require discipline. In the end though, financial freedom is liberating in all aspects of your life. So, don’t let anything hold you back.

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