After getting into debt, your credit score and report can be a wreck. You'll likely have to do some serious work to repair the damage done, but getting your credit score and report cleaned up is possible when you approach the task with consistency and willingness for change. On your credit repair journey, having a few questions is normal. Finding the answers to those questions may speed up the repair process.
How long will it take to repair my credit?
The time necessary to repair credit depends in part on how low your credit score gets. It also depends on the method of credit repair you use and how diligent you are about changing old spending habits. However, many people are able to show they have rehabilitated themselves financially in as little as two years. At this point, you may qualify for financing again, although you'll likely have higher rates of interest. This will let you start new credit relationships and build a good payment history. If you do not approach credit repair seriously, it can take much longer to get your credit score back up.
What is the best way to repair credit?
When trying to manage debt and get credit back in order, you can use debt counseling, refinancing, consolidation, negotiation, settlement, resolution or bankruptcy to take control of your finances. Each of these methods of repairing credit has advantages and disadvantages.
In general, refinancing, consolidation and negotiation are the best way to repair your credit if your debt situation is not very serious. Settlement or resolution usually are the best options if you know you can't pay your full balance, but using these methods initially causes your credit to drop because your accounts are noted negatively as "not paid as agreed" or "settled." However, they build credit over the long term because they reduce the balance of debt still on your shoulders, making it easier to make in-full payments on time on remaining debts.
The worst way to repair credit is to declare bankruptcy -- this can drop your credit score by 100 to 300 points. Some creditors won't extend financing or lines of credit with a bankruptcy on your record, making it hard to build a good payment history. However, like settlement and resolution, because you no longer are responsible for former debts, you can start over and may be able to pay remaining or future debts more easily.
How does paying on time help repair credit?
When you pay your creditors on time, they do not have a reason to charge you penalties like late fees that make it hard to pay all you owe. You also don't have delinquencies for them to report to credit bureaus. The biggest way paying on time helps your credit, however, is by establishing a positive payment history. Your payment history makes up the largest part of your credit score, 35 percent.
Should I close accounts I don't use to help my credit score?
Closing old accounts generally doesn't help your credit score. In fact, part of your score is your debt utilization ratio, which is the amount of credit you're using divided by the amount of credit you have available. The higher debt utilization ratio you have, the worse your credit score is. By closing accounts, you can cause your debt utilization ratio to rise. Closing old accounts also may truncate your credit history length, which is a full 15 percent of your score. Only close unused accounts if doing so will prevent you from spending and getting into further debt and if you close the account, make sure the creditor notes that the account has been closed at your own request.
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