Five steps to turning bad credit into great credit.

It’s a fact that poor credit can drastically affect your ability to qualify for credit cards, auto loans and mortgages. But did you know that poor credit can also affect your ability to find an apartment, turn on your utilities, or even get a job?

Bad credit doesn’t have to be a life sentence. It doesn’t matter if you have a previous history of collections, charge-offs, delinquent payments or even if you’ve filed for bankruptcy – it’s never too late to get back on track and rebuild your credit. While negative information will remain in your credit reports for 7-10 years, it doesn’t mean that you have to wait that long to start rebuilding your credit. By following these five simple steps, you can start improving your credit now – even before these negative items expire.

Step 1: Where do you stand?

Before you can determine where to start, you need to find out where you stand. To do this, you’ll need to find out exactly what’s being maintained in your credit reports at each of the three credit reporting agencies: Equifax, Experian, & TransUnion. Thanks to the Fair Credit Reporting Act (FCRA), every consumer is entitled to a free copy of his or her credit reports once a year. To order your free reports, simply go to www.annualcreditreport.com.

The FCRA also gives you the right to request a free copy of your credit report if you are denied credit, insurance or employment because of the information in your credit reports. You have 60 days from the date you receive the denial notice to request your free report.

Step 2: Review your reports carefully for errors!

Believe it or not, it’s very common for credit reports to contain errors. This is why it’s imperative that you take the time to make sure the information is accurate. While reviewing your reports, be sure to check the balances, date opened, account status and any other notes associated with each account.

If you have negative records in your report (collections, charge-offs, judgments, late payments, liens or bankruptcy) be sure to double-check the expiration dates. Most negative information will remain in your credit report for 7 years but there are some exceptions. Bankruptcies for example, can remain for up to 10 years. It’s important to understand that the older these negative items get, the less impact they will have until eventually, they have very little impact and expire from your reports completely.

Step 3: Dispute any errors!

If you find errors on your credit reports, you’ll need to dispute them directly with the credit reporting agencies. To do so, you can either complete the online dispute form provided with your credit report order or you can do it the old fashioned way and write a letter. Personally, I prefer the old fashioned method because you’re not limited to the multiple choice options and online explanation limited character restrictions. Be specific and clearly explain each dispute and why it’s wrong. Include any supporting documentation if you have it. It’s also a good idea to include a copy of your credit report with notations written directly on the report for each mistake. Keep copies of everything you send for your own records.

Once the credit bureau receives your dispute, they will launch an investigation to verify the accuracy of the information. The credit reporting agency has 30 days to investigate the dispute and if the item cannot be verified, it must be removed. Once the investigation has been completed, the credit reporting agency must send you a free copy of your report if any changes were made.

Step 4: Formulate a budget and eliminate your debt!

Now that we’ve identified where you stand and have established that your credit report is accurate and free of errors, we’re ready to start rebuilding your credit. In order to do this, you’re going to need to formulate a budget that allows you pay down your debt and keep your payments on time, all the time. If you’re having trouble making payments, contact your creditors and explain your situation. In most cases, your creditors will work out a payment plan until you get back on your feet. You may even be able to negotiate with them to keep your accounts current and not be reported as late. You can also ask for reduced monthly payments, or even request to change your due dates in order to balance out your monthly bills. The same strategy can be used for fixed-loan payments, but it should only be used as a short-term solution. Use any extra money to pay off debts one at a time, focusing on the higher interest debts first.

It’s important to note that once you pay off an account, you should NEVER CLOSE THE ACCOUNT. Just leave your accounts open and simply stop using them. Closing accounts can actually have a negative impact on your credit scores. This is because the percentage of your available credit in comparison to the debt you owe is an important factor in calculating credit scores. This is called “revolving utilization,’ or your “debt-to-limit” ratio. When you close an account, the amount of available credit decreases, which can result in a higher revolving utilization and lower your score. As a general rule, I always advise keeping your revolving utilization at 10% or less.

Step 5: Start adding positive information to your credit reports and keep it consistent!

This step is crucial for those that have a previous history of derogatory information in their credit reports. Because negative information cannot be removed from your credit report, the only way to help improve your credit rating is to add new, positive information to your credit reports. This may mean that you have to endure a secured credit card for a while to get you restarted. Secured cards can be a great way to start over and re-establish a solid credit history.

There you have it. With these five steps and a little hard work, you’ll be well on your way to turning poor credit into great credit!