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How to Fix Bad Credit

Read about how to fix bad credit.

The first step in fixing bad credit is admitting there's a problem. [©Jupiter Images, 2010]
©Jupiter Images, 2010
The first step in fixing bad credit is admitting there's a problem.

Bad credit can make financial life difficult. A low credit score makes it harder and more expensive to finance a home loan or a car loan, for example. And as unfair as it seems, bad credit also means you'll probably pay more for insurance. Repairing bad credit is not an easy process, but there are some tips you can consider to fix bad credit.

What is a credit score?

Your credit score is a number that a credit bureau, or credit reporting agency, uses to indicate how worthy of credit you are. A high score means that the credit bureau thinks you can handle a great deal of credit, while a low score suggests that the credit bureau thinks there is a good chance you may stuff your bills down the sewer and run off to Kathmandu. But how do credit bureaus determine your credit score? They're kind of like weather forecasters. They collect as much information as they can and plug it all into a computer model, which produces an educated guess about your future decisions based on the past behavior of people who are statistically similar to you.

Your history of paying bills (whether late or on time), run-ins with collection agencies and repo men, number of accounts, and even attempts to get credit lines are all part of your credit report and factor into your score.

How to Fix Bad Credit

Negative events on a credit report lead to a low credit score. The first step toward repairing credit is to obtain a copy of your credit report. AnnualCreditReport.com, a centralized and secure online credit service for consumers, offers a free credit report once every 12 months from three nationwide credit agencies (Experian, Equifax and TransUnion). However, you'll have to pay a small fee if you want them to reveal your actual credit score.

Take a look at your credit report and make sure it doesnt include erroneous information. If there are mistakes, you can dispute them for free. The Federal Trade Commission (FTC) offers advice on disputing items on your credit report.

Even if your low credit score is an accurate reflection of your credit history, there are steps you can take to improve your credit over time:

Start paying your bills -- ON TIME

Start paying off your credit cards, even if youre doing it slowly. The amount of debt you have compared to your credit limits -- in other words, how close your cards are to being maxed out -- can have an effect on your credit score.

Dont apply for too many lines of new credit

Your credit report contains information about inquiries that banks and other lenders make when theyre considering you for a line of credit. Unfortunately, you cant improve your credit score overnight -- it will take a well-documented history of responsible behavior extending over a substantial period of time before your score dramatically improves. Yes, it takes discipline, but look at it as an investment in your future.

Credit Counseling

If you are in dire straights with your creditors or utility providers, credit counseling may help. Credit counselors will give you advice, help you budget, and encourage you to make wise financial decisions. But not all credit counselors have your best interests at heart -- some unscrupulous businesses will actually charge you high fees and only make your problems worse. The FTC offers in-depth advice on how to choose a credit counselor.

Beware of Credit Repair Scams

There are some companies that promise to clean up your credit report for you -- as if they have some way to actually remove negative events from your credit history. But the quick fixes that they promise never actually work, even after youve forked over huge fees.

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