How To Clean Up Credit Without Paying

Don't fall for scams promising easy, overnight credit repair. If you want to fix your poor credit, you can (and should) do it yourself. Follow these six simple steps to do-it-yourself credit repair.

If you've had an overdue student loan, years of high credit card balances, collections accounts, or even a foreclosure, unfortunately, you probably have below-average or bad credit.

With poor credit, you may not be able to get approved for new credit products like credit cards. Although you may still be able to take out an auto loan or a mortgage, you'll pay a much higher interest rate because of your low credit score. Compared to a borrower with good credit, someone with poor credit can pay $50,000 more in interest on a mortgage. Over an entire lifetime, you could end up paying over $200,000 more in unnecessary interest just because of bad credit.

The good news is—as you should know if you've read Money Under 30 for a while—that you can repair your credit score all on your own. It just requires a little bit of know-how and a good bit of patience. Here are six steps towards building better credit.

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1. Figure out where you stand

Before you begin do-it-yourself credit repair, you'll want to get copies of your full credit reports from all three bureaus (Experian, TransUnion, and Equifax).

You can get your reports truly free, once a year, at www.annualcreditreport.com or by calling 1-877-322-8228. Other websites may claim to offer free reports, but the Federal Trade Commission (FTC) warns that these offers are often deceptive.

You can also try free credit score tracking apps like Credit Karma to get a sense of where you stand.

Credit scores range from 300 to 850. A score of between 700 and 740, depending on the scoring method used, is considered "good credit" and usually enough to qualify you for the best credit cards and lowest mortgage rates.

Related: How Credit Works: Understanding Your Report And Score

2. If you find errors, dispute them

The next step in credit repair is to dispute incorrect information on your credit report.

Errors aren't common, but they happen. Of course, sometimes bad credit is just your fault. You shouldn't try to argue accurate information, but if you do see errors–even small ones—it's worth cleaning them up. Here's how:

Once you have the copy of your full credit report in hand, check your identity information (Social Security number, spelling of your name and address), and credit history.

Review the list of credit cards, outstanding debts, and major purchases. If you see any mistakes or questionable items, make a copy of the report and highlight the error.

Next, gather any information that you have to back you up, such as bank account statements, and make copies of these as well. This is important! The credit bureaus won't do anything without proof.

Write a letter to the specific credit reporting agency that shows the falsehood, whether it is Experian, Equifax, or TransUnion. Explain the mistake and include a copy of the highlighted report along with your documentation. Although certain bureaus now let you submit disputes online, it's not a bad idea to send this letter by certified mail, and keep a copy for yourself. The reporting agency has 30 days from the receipt of your letter to respond. The Federal Trade Commission provides advice on contacting the credit bureaus about discrepancies. Here are the contact numbers and web sites for the three credit bureaus:

Experian: 1-888-397-3742 – www.experian.com
TransUnion: 1-800-916-8800 – www.transunion.com
Equifax: 800-685-1111 – www.equifax.com

3. Stop the bleeding

Once you deal with any errors on your credit report, it's time to ensure you're not still spending more than you can afford each month.

Why is this so important? It's because there are only three simple things to do to repair bad credit:

Pay all of your bills on time
Pay down debt (especially credit card debt)
Avoid applying for credit

But before you can do these things, you need to make sure you're not spending more than you earn—you need a budget.

To start, review your tax returns for the past two years to get a sense of how much money you actually take home in a year.

Subtract your regular monthly expenses (rent or mortgage, car payments, and home, car and health insurance) from your current income.

Next, estimate your monthly spending habits for other expenses such as gas, groceries and entertainment. Create a limit, based on your income, of what you can spend in each of the different categories of expenses. For example, if you tend to spend $400 a month on groceries, try to stick to $300 a month on groceries by making changes like buying generic brands, using coupons, and resisting impulse purchases.

4. Pay all bills on time going forward

If you want to fix bad credit, you need to start paying all of your monthly bills on time, period!

If you're behind on any bill, get caught up as soon as you can. On-time payments are the single most important factor to your credit score. Simply put, your credit won't improve until you can consistently pay every bill on time.

One downside of this is that you don't get credit for basic bills like your monthly phone and utilities. Experian Boost can help with that. The free service links your bank account to Experian to monitor your monthly payments. On average, customers have enjoyed a 13-point FICO score increase using this service.

5. Pay down credit card balances

Take charge of your credit cards by paying down their balances.

If you have any outstanding balances, make room in your budget to pay down these debts bit by bit, every month until they are gone.

Know your credit limits and make every effort to stay well under the maximum when charging items.

That's because credit bureaus analyze your debt load as a ratio. If you charge $500 on a card which has a $1,500 limit, you've used 33%, which is better for your credit score than charging the same amount on a card which has a $1,000 limit (50%), both of which are better than being maxed out (100%).

Related: Big Fat Guide to Getting Out of Debt

Pay these credit cards down, but don't cancel them. The total amount of available credit affects your score, even if you owe nothing.

6. Don't apply for new credit

Finally, resist the temptation to open a new credit card, even when a store offers a discount on your purchase for doing so.

Each time you apply for credit is listed on your credit report as a "hard inquiry" and if you have too many within two years, your credit score will suffer. In general, a consumer with good credit can apply for credit a few times each year before it begins to affect their credit score. If you're already starting with below-average credit, however, these inquiries may have more of an impact on your score and delay your ultimate goal of watching your credit score climb.

Do-It-Yourself Credit Repair: Fix Bad Credit On Your Own In 6 Easy Steps - Self

When the dust settles, consider a unique way to build your credit like Self. Self offers four different types of loans, each which you pay down monthly. At the end of the term, Self sends you back the initial term of the loan, minus interest and a small application fee. Each month you make a payment, they'll report to good behavior to the credit bureaus and you're credit score and profile will likely improve. The initial application may drop your credit score, but if you make all payments (to yourself) on-time, it should increase.

Experian Boost™ is another way for people with a poor or limited credit history to get ahead. Many times, these people will have a positive, consistent record of paying utilities on time, but those payments aren't being included in their credit profile. Experian Boost™ allows people to include this payment history to their credit score. Best of all – it's completely free.

Disclaimer – Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost™.

Summary

Start by looking at your credit reports to get a sense of where you stand.

If you see any errors, dispute them with the credit bureaus. Then, focus on paying down any credit card debt while making every bill payment on time. In the meantime, do not apply for new credit. Basically, in order to repair your credit, you will need to limit your use of credit.

It may take months or even a couple of years for your credit score to improve, but if you plan on buying a new home, or taking on any other big debt, it's well worth it.

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