The First Step to Repair Bad Credit

More than 30 million Americans have some credit problems, including credit reports riddled with negative information and subprime credit scores, according to MSN Money columnist Liz Pulliam Weston. These problems are a barrier to opening new accounts and getting loans. There are ways to repair bad credit, and certain steps pave the way for a smooth process.

Definition

Bad credit means financial problems that appear on a consumer's credit reports. Information from these reports is used to calculate credit scores, so negative items mean a low score, according to the FICO credit score company. Typical examples of bad credit include delinquent or skipped payments on credit cards and loans, accounts that have been charged off or placed with a collection agency, court judgments, liens, repossessed vehicles or other property, foreclosures and bankruptcy. Collection accounts, court cases and seized assets are worse than late payments, but all of these things are harmful to some degree, FICO explains.

Solution

FICO cites building up a positive payment history as the more important factor in good credit. Rebuilding a record of prompt payments is the first credit repair step because it shows creditors a person is willing and able to meet financial obligations. This is true whether the main problem is minor delinquencies or full-blown bankruptcy. People whose old accounts are charged off or discharged through bankruptcy must open new accounts.

Pat Curry of Bankrate explains that people with bad credit can deposit money with a bank and get a secured credit card that uses the funds as collateral. A typical deposit is $300 to $500, and the bank usually converts the account into a regular unsecured credit card if the customer pays on time for at least a year.

Considerations

The Federal Trade Commission (FTC) advises reviewing credit reports to ensure the first credit repair steps are working and that new information is being reported accurately. Experian, Equifax and TransUnion are the three bureaus that compile reports. They are required under the Fair Credit Reporting Act (FCRA) to give consumers free yearly reports requested through the annualcreditreport.com website. The FCRA allows for dispute of mistakes and requires unverified information to be erased. If a creditor is not reporting a new, positive report the consumer can request that it do so.

Time Frame

Most items that constitute bad credit stay on credit reports for seven years, while bankruptcies remain for a decade, the FTC explains. Creditors see them for the entire time but do not give them much weight after a few years if recent financial records are good. The credit repair process is ongoing because it is critical to build up the positive recent history to offset older negative items.

Warning

Once the first credit repair steps are taken, the consumer must continue the efforts without any missteps. FICO warns that any late payments or other problems destroy the progress and bring the credit score back down.