The Covid-19 pandemic led to financial instability worldwide, and many individuals struggled to make ends meet. As a result, various companies and organizations shut down, with the current unemployment rate at 3.7% in the United States. Perhaps you’ve accumulated bad credit over the past few years and are looking to clean it up.
Dealing with bad credit can be tricky because if you’re unsure which methods to adopt, you can do more harm than good. Accumulating debt causes various disadvantages and reduces your chances of getting financial help when required. Keep reading as we explain what you should do to clean up your bad credit history.
1. Identify Issues In Your Credit Reports
Unsurprisingly, the first step to achieving financial stability is to sift through your credit reports. Three primary consumer credit reports are generated by the three major credit bureaus: Experian, TransUnion, and Equifax. You are lawfully entitled to get one free copy of each report every year. In contrast, you can opt for year-round tracking using a third-party service or through the bureaus.
Creditors calculate general creditworthiness and credit scores based on the information in your credit reports, so regularly check them to determine whether they are accurate and updated. The source of bad credit can also be found in these reports, meaning you can identify all the accounts and negative items holding you back. Go through your statements and make a note of entries such as:
● Bankruptcy discharges
● Collections accounts
● Credit lines with high utilization
● Home loan foreclosure
● Late payments
● Multiple recent hard credit inquiries
● Overdue accounts
Each type of account or item’s impact on your credit score and creditworthiness varies. For instance, hard inquiries are less damaging to credit than high utilization, which, in turn, is a minor problem compared to a missed payment. The most significant factor in the credit score calculation is your payment history. It has the most considerable credit impact, such as bankruptcy, foreclosure, missed payments, or any other item that portrays a failure to pay back your debts.
When you’ve discovered where the issues lie, you can plan to tackle each problem individually, which can include eliminating a reporting error, waiting for an old error to fall off your report, or catching up on past-due accounts.
2. Quickly Address Any Unsubstantiated Items Or Errors
Before cleaning up your negative items, you’ll need to ensure that your credit report information is current and accurate. This means minute details like your address and name to crucial open and closed accounts. You should be able to recognize all your accounts, and if any problems are found in a report, don’t hesitate to file a credit dispute with the credit bureaus. For example, if you notice debt that doesn’t belong to you, take immediate action to remove this unsubstantiated account.
This process is called credit repair and can be done online on the bureau’s website. It’s recommended to hire a professional credit repair company to act on your behalf because they are well-equipped to handle these matters for you. If you stumble upon accounts with addresses you don’t recognize, don’t remember opening, or any other signs of identity theft and fraud, it’s essential to address these problems as soon as possible. Additionally, misreported numbers and spelling errors need to be tackled right away.
Suppose your creditors usually inform the bureaus regarding your account balances monthly. If they report a higher balance than your actual one, your credit score might drop due to an inflated utilization rate. You can sort out unsubstantiated accounts through credit repairs. This account type needs more documentation for the collection agency or creditor to collect information. Unless the collecting party proves you owe a debt, you can have it removed from your reports by challenging the account.
3. Prioritize Overdue And Outstanding Debts
Once you’ve gotten rid of any errors or disputable items using credit repair, you need to focus on every remaining negative account individually. In most cases, this entails handling high balances, utilization, or outstanding debt. One way of managing your debt is by obtaining a personal installment loan, enabling you to organize various debts into a single loan and lowering the interest rate on your existing debts.
You can connect with lenders and find one that aligns with your needs through online lending networks. Check out urgent loans for bad credit so you can determine the one best suited for your situation. You need to pay immediate attention to outstanding debt and if you’re unable to pay it off, consider getting a personal loan for this purpose and bring the deficit to current. Getting in touch with your creditor and discussing whether they can work out an affordable payment plan for you is also recommended.
In the case of high-interest debt, paying it off reduces the overall interest rate you’re subject to and helps with debt-to-income ratios and utilization. You then save enough money to pay back other debts, achieving your goal of cleaning up bad credit even faster.
Lastly, don’t forget about paying off your collections accounts. Although settling a debt you owe to the collection agency doesn’t erase the credit damage, a paid collection is always viewed more positively by a future creditor than an unpaid debt.
4. Develop Positive Payment History
If you’ve carried out the processes mentioned above, you can proceed by building a recent positive payment history. However, it’s important to note that when dealing with bad credit, time is your best friend. Payment history holds a lot of significance for your credit, and scoring models focus much more on your recent history than what happened years ago. Therefore, you can clear up many messes by staying on track now and in the future.
A low score doesn’t open a doorway of opportunities for obtaining new credit, but a low-limit credit card is an excellent place to start. However, if you opt for an unsecured credit card, you will have to pay an annual processing fee. In contrast, a secured credit card is better if you can muster the deposit.
Typically, creditors wish to observe around six months of positive payment history; the longer this period gets, the better. It portrays that you’re making responsible strides to a better financial future and have left your credit mistakes in the past. Automate your credit card process to build your credit history with ease.
5. Check And Track Your Credit Reports And Scores Frequently
The worst thing you can do is clean up your credit once, only to go back to ignoring it. After you’ve cleared all your debts, derive a regular schedule for checking your credit reports and tracking your credit scores. Make use of your free annual credit reports to determine whether there are any errors, fraudulent accounts, or inaccuracies in your reports.
However, these free credit reports usually don’t include credit scores. Still, many free third-party services and credit cards offer quarterly or monthly information on your scores. You can also research to find credit monitoring services that provide additional services. These companies give identity protection benefits, such as monitoring your social security number, and pricing varies according to the services you opt for.
Unless you’re diligent about keeping up with payments on your credit, you’ll be left with a stubborn mess to clean up. If you find yourself in this situation, there are steps you can take to clean up your financial situation. Cleaning up bad credit can be challenging, no doubt, but you need to follow a straightforward path of identifying the problems and tackling them one by one. You can get rid of even the worst cases of bad credit with hard work and patience. Just know it won’t happen overnight, so give it some time.