Understanding the Basics of Credit Repair

Not paying bills on time negatively impacts your credit rating. Whether the inability to pay bills is caused by job loss, disability or irresponsibility, the outcome is the same. Poor credit can block your ability to get loans, credit cards and some jobs. Credit repair is possible, however, it will take time and focus on your part. Understanding the basics of credit repair will help you save time.

Doing it Right

The Federal Trade Commission urges consumers to ignore claims by credit repair companies that credit issues are easily fixed. Such companies promise 100 percent guarantees that unpaid debts will be removed from credit reports and scores will skyrocket within weeks or months. These claims are untrue, according to the FTC. Credit repair is possible, but only through methodical, ethical methods.

Examine the Damage

Knowing what your credit report contains is the first step to credit repair. You are entitled to receive a free annual credit report. In addition, any time you are denied credit you also are entitled to receive a free credit report. Annual reports can be ordered at freecreditreport.com. In the event of a credit denial, submit a copy of the denial letter to each of the three credit reporting agencies and request a free credit report be sent to you.

The report will list every creditor you have dealt with that reports to the agency. Your payment history will be listed by each creditor's name. If you have court-ordered judgments or government liens under your name, they also can appear on your credit report.

Check the report for inaccurate information. If you find errors, write the credit reporting agency disputing the information in question. The agency must contact the creditor and request proof that you owe the debt and forward that information to you. If the creditor cannot provide proof, the agency will remove the information from your credit report.

Valid Debts

List all valid debts that are in collection agencies or listed as unpaid. Paying the debts will help your credit rating, though it will not make it perfect. You can contact each creditor, discuss the bill and request a promise to report to the credit agency when the debt has been paid. If the creditor agrees to take a reduced amount of money to satisfy the debt, it will most likely note this on the credit report. This alerts future potential creditors you most likely paid a reduced amount but also tells them that you followed through on your promise. In securing a promise to report payment to the credit bureaus, record who you spoke with, the date of the conversation or email and what was said.

Rebuild While Fixing

Simply paying off bad debt will improve your credit rating some, but you need to consider building new credit at the same time. Once you have paid down enough debts to free up some cash, apply for a secured credit card. A secured credit card requires a cash deposit and gives you a card with a limit equal to your held deposit. Use the card for a small amount of purchases each month and pay it off as soon as the bill arrives. Building good credit shows potential creditors you have corrected the previous issue and are now in a financial position to handle a line of credit.

Recheck the Report

Ordering another credit report six months after the last bill has been paid and new credit has been started gives you the opportunity to see your efforts pay off. It also allows you to address any issues such as a creditor not reporting that you paid a debt. While they are not under a legal obligation to report payments, most will do so.