Guide to Repair Bad Credit

Even if you're not applying for a loan, bad credit can hurt. Insurance companies, employers and landlords often review credit reports to see if you look like a dependable, trustworthy individual. Bad credit isn't eternal, though; if you work at it, you can repair your credit and boost your score.

Credit Reports

You have the legal right to see your credit reports from the three main bureaus---Equifax, TransUnion and Experian---once every 12 months. Go over the reports and look for any errors: Accounts you didn't open, back debts you've paid off or inaccurately low credit limits. Contact the bureaus and ask them to correct the mistakes. You can obtain your free copies by going to the Annual Credit Report website (see Resources).

Utilization

The total amount of debt you carry counts for 30 percent of your credit score, according to the Fair Isaac Corporation, which created the FICO scoring system. The company recommends paying down your debt and keeping it down as a way to improve your score. Your utilization ratio---the ratio between your current debt and the total credit you have available---is also important. That means you're better off with a low balance on several credit cards than one card paid off and the others maxed out.

Using Credit

If your credit history is littered with bankruptcies or late payments, you need to prove things have changed. Do whatever it takes to make your payments on time. Your current payment history will count for more than last year's missed payments. If you no longer have any credit accounts open, start one. Take out a new card and pay it off every month to avoid paying interest. If your credit is really bad, look at taking out a secured bank credit card, which uses your bank account as collateral.

Time Frame

Credit bureaus look at the amount of time you've had your accounts, with long-term accounts preferred. If you pay off cards you've had for a while, don't close the account. Instead, make small, occasional purchases and pay them off promptly so the account stays current. Don't open a lot of new accounts, which will lower your score and may look suspicious to lenders, particularly if you've had problems managing credit in the past.