How to Repair Bad Credit

A roller-coaster ride. A vortex spiraling ever downward. Your worst nightmare. The Great Depression all over again. However you choose to describe it, the current economic climate has almost everybody thinking twice (at least!) about personal finances and how to weather through these tough times.

Many of us have been hit hard where it hurts - in the bank account. Some economic distress is of our own making but some of it is beyond our control. Either way, many Americans are wondering how to repair bad credit no matter what its cause.

There’s no one sure way to repair a tarnished credit rating because there are no two consumers in the same financial situation. The good news, though, is that there are some standardized guidelines that apply to all of us. Understanding them is sure to help.

Credit scores are often the turning point between getting an application approved or denied. Scores are based on a very complicated mathematical formula developed by the Fair Isaac Corporation, which dubs its own grading system as the FICO score.

From FICO, the largest three credit reporting bureaus operating in the United States each apply their own set of formulas to determine an individual consumer’s credit worthiness. When we apply for a line of credit, the creditor almost always checks with one of these three companies to get our credit score. These companies are Equifax, Experian, and TransUnion.

Between FICO and the Big Three, our credit history is reviewed, analyzed, and scored. If we score high enough, our applications are approved. A low score often means our application will be denied.

How to repair bad credit requires working with the guidelines these companies use to determine our credit score. Although slightly different from company to company, they all look at the same basic information.

This information is called our credit history. This history develops over a long period of time. It’s a reflection of the accounts we’ve opened, the money we’ve borrowed, the debts we’ve paid or not paid back. It reflects the consistency with which we’ve made the debt repayments, including paying the monthly payments in full or not and on time or not.

Borrowing money, even lots of it, is not a negative reflection on our credit rating as long as every payment has been made in full and on time. In fact, an active history of borrowing and repaying is better than not borrowing at all. The three credit reporting agencies base their scores on history alone.

Creditors, however, will also consider our current income and our debt-to-income ratio. If this new home, car, credit card, or whatever is approved, do we have enough disposable income to make the payments without starving the children? If there seems to be no worries about the consumer’s ability to repay, the application is usually approved.

Before worrying about how to repair bad credit, consumers must first evaluate their own individual financial situation. Limiting concerns to mere income and expenses is not enough. Credit ratings and scores are just as important as income and household expense. The first step every consumer should take is asking each of the three credit reporting companies for a current copy of his or her own credit report.