How to Repair Bad Credit

Credit Repair  
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How to Repair Bad Credit

If you’ve received more credit rejection letters than you care to think about, don’t despair. Tons of information on how to repair bad credit is at your fingertips. You can start now by using the tools that millions of other people utilize and turn your credit rating around too. All you need is a commitment to the process, patience, and determination to get the credit you deserve.

A low credit score is not a reflection on you as a person, no matter how much the lender tries to make you feel that it is. There are precious few human beings that have had perfect credit from the cradle to the grave. Think of bad credit as a challenge that can be overcome. Let’s talk about the following topics to start you on your way:

  1. Is it really that bad?
  2. Interpreting a denial letter
  3. How to repair bad credit
  4. Watch out for credit repair scams




Is it Really That Bad?

A poor credit score can mean an inability to open a bank account, higher insurance costs, and sky high interest rates. Also, many employers today weigh in the credit rating of a potential employee and will choose a candidate with a higher score than one with bad credit. For these reasons and more, it is best to take your credit seriously.

Maybe you already know that there are some issues with your credit. Like many people with bad credit, you may have missed some car payments or paid late on a credit card due to an unexpected financial setback. It doesn’t have to end with that, however. Begin by finding out exactly where you stand when it comes to your credit score.  Get your hands on a credit report from each agency. This service is free to consumers once each year.

Now, what you read on the report may make you wince, but remember, this is the first step toward healthier finances. The information on your credit report is what makes up your credit score (also known as a FICO score). This is your credit “grade”, which can range from 300 (very poor) to 800+ (super excellent). Your FICO score is calculated using these five factors:


  1. Your payment history (35%)
  2. How much you owe (30%)
  3. How long you’ve had credit (15%)
  4. Number of new accounts opened (10%)
  5. Different types of credit you have (10%)


Some of these factors are open to the interpretation of the lender. For instance, some lenders look more favorably on a borrower with a decent (but not perfect) mortgage payment history than one with a wallet full of maxed out credit cards with regular minimum payments each month. If you have a low credit score, you can use the negative information in your report to fix the issues which lower your rating. On the other hand, you may find that your credit isn’t as bad as you thought. You may have just applied to the wrong lender.




Interpreting a Denial Letter

If you have been denied an auto loan, credit card, or line of credit, the lender will send you a letter after giving you a verbal denial. To soften the blow, they may call it an “adverse action letter”, but it’s basically a “no” in writing.

The letter will state the reporting agencies the lender consulted and the reasons for the denial. The form letter terminology does not explain exactly why you were refused, nor give you suggestions on how to repair bad credit. But many of the answers to how to repair bad credit are found in the language used in the denial letter, such as:


  • “Recent delinquencies”. Late payments. This is one of the biggest reasons for denial.
  • “Too few installment accounts”. This refers to the credit mix portion of your FICO score. For instance, the lender wants to see how you handle different types of credit like car loans and mortgages mixed with installment and other accounts.
  • “No recent revolving account activity”. As crazy at is seems, lenders want you to use the credit so they can watch how you pay it back. But then, if you tap into a large percentage of your credit line (say, over 30%), it can count against you.
  • “Too many inquiries on your credit report”. Have you been applying for credit a lot recently? Each time a potential lender makes a “hard” inquiry (runs your credit), it goes on your report. Some lenders see this as a sign of financial distress or that you have no discipline with credit.
  • “You have a recent collection or public record”. A creditor sent your account to a collection agency. A public record can also mean there is a bankruptcy on your record, or you’ve been sued for nonpayment


There are all sorts of other reasons why your credit can be denied, from charge offs (a creditor wrote off your debt as a loss) to low income. Again, you just need to know how to repair bad credit and turn these negatives into positives.


How to Repair Bad Credit

You do not have to accept living with damaged credit. You can be proactive in having a higher score that will get you more approvals at lower interest rates. The first step is getting your credit reports and then reading them very carefully. Some problems with your credit can be pretty easily fixed such as:



  • Make sure that the report does not show money that you have already paid as still due.
  • Check for inaccuracies like wrong names (identity theft), or the bad credit of another person (like an ex-spouse) being reported on your credit.
  • Have negative information removed if it is outdated. There is a time limit for how long a negative report can remain on your record. For instance, bankruptcies usually drop off in 10 years; other information can remain 7 years or more.



Contact the credit reporting agency in writing so that mistakes can be removed. Disputes are usually resolved in about 45 days. It is also a good idea to submit an explanation for negative reports (your side of the story) if the agency allows. Next, take the following additional steps to repair bad credit:


  • Take the information from the denial letter to formulate a credit recovery plan. First and foremost, stop making late payments. Start paying on time each month, even if you have to take extra work or make other sacrifices. Paying more than the minimum payments is also a good credit booster.
  • If there is an account with a small balance that you can pay off, do so as soon as possible. This will eventually work in your favor because you’ll have less debt. However, do not close the account because you want a paidin full account in your history.
  • Do not keep applying for credit in a short period of time.
  • Consider opening a secured bank account or card; consistent payments will be reported.
  • Keep your ratio of debt to credit low. Use less than 30% of your approved credit, which is the amount lenders like to see to show that you manage credit well.


Watch Out for Credit Repair Scams

Do not fall for credit repair scams that claim they can perform a “quick fix” on your credit within 30 days. There is no legal way to reverse accurate negative information on your report with the snap of the fingers. It takes time and effort. The money you spend on these scammers can be better used to pay down the bills you owe.

If you have difficulty with credit or money management, it may be a good idea seek help from a reputable credit counseling agency. Make sure you are diligent about researching the counseling service to make sure they are not scammers in disguise. Many people find that non-profits, universities, military, and financial institutions offer respectable counseling services. You can also get a referral from a trusted friend or relative who has had success with a reliable financial counseling program.

The difference between good and bad credit can have far reaching consequences. While not everyone can have perfect credit, improving and protecting your credit is a sound financial decision. In the end, the answer to how to repair bad credit begins with you. With patience and discipline, you will develop good habits that result in a much better financial position overall.




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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.