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How to fix bad credit: Everything you need to know

At a glance:

If you have been through a financial crisis like foreclosure, bankruptcy or some other event that ruined your credit, rest assured that all is not lost — you can still get credit.

You need some time, patience, and discipline, and in a few years, you can have your credit back up and working for you.

Why you don’t want bad credit

Having bad credit can be bad enough. It can be the result of poor financial decision-making, or it can be the result of something you can't control. In any case, fortune is often not on your side and the only way out is to slowly crawl back up.

Should you even get a card?

Credit cards are not just very convenient, but sometimes very helpful in a bind.

If you have an emergency, such as being stuck for a few days in a strange locale, a card can be a godsend. Also, they are helpful if you want to build up a good credit history. Further, you may need one in order to rent a car or hotel, or do online buying.

But if these are not an issue for you, can you wait a while before getting a card? This may be a time to devote to building up savings, cutting expenses in your life, and learning to handle your finances. Your daily expenses are best paid for with cash during this stage of your credit-rebuilding. The last thing you want to do is end up in the same boat you were in earlier.

Credit cards are not on favorable terms

Some credit cards target those with bad credit.

These cards tend to have very high interest rates, high fees for late payments and going over the credit limit, and a variety of other fees for things like setting up the account, getting a credit limit increase, and simply for having the card (the annual fee). Those who are not careful can find themselves back in the same situation they were in earlier.

Ideally, you want your credit card to report your payment status to the credit bureaus. Some of these cards do not do that; it is important to find out before you get one that it does indeed report to the bureaus. Otherwise, it will not help you rebuild your credit.

You might be tempted to try prepaid credit cards. While they can be useful at times, they do not report to credit bureaus because they are not credit products, so your efforts at building up your credit with these cards will come to nil.

You're being marketed to by scammers

Scammers target those with bad credit in hopes that they will act out of desperation and without doing the necessary homework.

They might promise you a guaranteed loan without checking your credit history or income, and they might charge you a fee to "process" the guaranteed loan—and then they'll disappear if you actually send the money to them. In reality, it is illegal to promise you money in exchange for a fee.

Tips for rebuilding your credit score

Time can clean up a bad credit record, but it takes years, and during that time, you might suffer further misfortunes. One helpful thing to do is to start using credit actively. You can do this even if your credit is bad. It works in much the same manner as getting credit for the first time.

As you are rebuilding your credit, you will find it necessary to avoid getting into the traps that caused it to fall so badly before. This takes discipline, vigilance, the willingness to delay gratification and stop indulging, and patience.

That is why you should look into making a budget, cutting back your expenses, taking a second job, or other tough measures.

Don't avoid credit cards

Having bad credit may tempt you to swear off the credit cards, but if you want to improve your credit, you must eventually use credit. One option is to get a secured credit card, which requires you to put down a deposit that can be used as collateral.

When applying for new credit cards, too many applications can lower your credit score. Apply for only a few instead.

Don't do anything to harm your credit score

Your credit score is made of 35% payment history, 30% amount owed, 15% length of your credit history, 10% new credit, and 10% type of credit used. To keep your score good:

  • Pay your bills on time, fully if possible. Consider setting up automatic payment deductions from a bank account to pay your bills; this can help you avoid late fees and default interest rates.

  • If you can't make your payment on time, call up the card company and explain your situation. Ask to have the late fee waived. Though not guaranteed to work, card companies sometimes will waive them for you. They can also extend your due date for you and forego reporting the late payment to the credit bureaus.

  • Don't max out your cards. Using about a third of your credit limit is optimal.

  • Don't apply for a lot of new credit cards. Keep only a few.

  • Use your card or cards regularly so that you can build up a history. Charge only as much as you can pay off (set aside the cash for it ahead of time), and do this every month.

Americans mainly regret credit card debt. (Graphic: David Foster/Cashay)
Americans mainly regret credit card debt. (Graphic: David Foster/Cashay)

Closing a card

If you have more cards than you need, consider closing some of them. This will reduce your total available credit limit, which can work in your favor. Too much credit can make you appear risky. However, closing a card can negatively impact your credit score. Here are some things to keep in mind:

  • Closing a card that still has a balance can cause it to appear as maxed out on your credit report, since there is no longer a credit limit on it.

  • Closing your oldest card will shorten your credit history and therefore make you look risky.

  • Closing ALL of your cards can prevent you from using credit in the first place, which does not help your credit score.

  • Closing only those cards that have the least favorable terms (fees, interest rates, perks) may be in your best interest.

  • After you have closed a card (do it in writing), check your credit report a few months later to make sure that the card is indeed closed.

How to fix errors on your credit report

Credit reports are paramount in our financial lives because our society uses a lot of credit to begin with.

Your credit report is a snapshot of how you use credit and what your risk is to potential lenders. Even those we don't think of as lenders, such as landlords, use them to determine whether to work with us.

Fix errors

Credit reports are not always perfect.

Accounts that you paid off may still be reported as delinquent. There may even be accounts listed that are not yours (and this can be a sign of identity theft). The point is to make sure that everything on your report is accurate. Get your credit report once a year ( offers it free from all three bureaus) and check for errors.

Errors can include incorrect contact information about you, closed accounts that are listed as open, late payments that you paid on time, improperly classified bankruptcies, and accounts you closed that do not say "closed by consumer" on them.

How to file disputes

Credit bureaus provide special "disputed items" forms that you can fill out when you have something to dispute. Fill them out by noting everything that is incorrect or not up to date. Provide explanations where necessary.

After you fill them out and send them in, the bureaus have 30 days to investigate them. If your disputes have merit, the bureaus must remove or modify the incorrect information.

How to improve your credit report

A good way to start cleaning up your credit report is to fix any mistakes in it. Once that is done, there may be more work for you to do.

Clean up negative information

You should clean up anything that's negative that can be cleaned up. Negative information includes the following:

  • Delinquent accounts

  • Accounts in collection (this can include medical bills, phone bills, etc.)

  • Criminal records

  • Lawsuits against you

  • Court judgments against you

  • Late payments

  • Child support that has not been paid

This information stays in your credit report for seven years. Not all of it can be cleaned up right away, but work on cleaning up whatever can be cleaned up. For example, if you have overdue or delinquent accounts, contact them and make arrangements to start paying them back.

Some information can stay on your report longer. Bankruptcies can remain for seven years for completed Chapter 13 bankruptcies and 10 years for Chapter 7 bankruptcies. A criminal conviction can stay longer than that.

Add positive information

If your credit report does not include your current job, your previous employers, your current home address, and your telephone number, contact the credit bureaus and ask that this information be added.

The purpose of having this information is to show some stability. Lenders like to know that you are stable, because it suggests to them that you are a good credit risk.

Is your credit report missing any accounts you pay on time? You can contact the bureaus and provide evidence that shows you are paying them on time. The bureaus aren't required to add this to your report, but they may anyway.

How to get credit cards when you have bad credit

If your credit is bad, there are special forms of credit tailored just for you.

As long as you follow the terms laid out in the credit agreement, you can begin to build up your credit history and be viewed more favorably by potential lenders. However, these forms of credit can carry some harsh terms.

Secured cards

A secured card is one that is backed by collateral that can be taken if you should default on your monthly payments.

The collateral in this case is a deposit of money, usually at least $200. Secured cards usually charge an annual fee and may have an interest rate that is relatively high. However, they are an effective way to build credit. After about two years of using a secured card in good standing, you can try applying for a card with better terms.

Both large and small financial institutions offer them. Some secured cards have a conversion option that lets you convert them to regular credit cards after several months.

Subprime credit cards

A subprime credit card is one that is marketed to those who have bad credit or a limited credit history. Subprime cards may be secured or unsecured.

Unsecured cards are the traditional type of credit card; they do not require you to plunk down cash as collateral. But if your credit is bad, you will qualify only for subprime cards, and they will charge you a variety of fees that will eat into your available credit line. These may include a program fee, a setup fee, an annual fee, and possibly a monthly fee. The interest rate will typically be high, and the credit limit will be fairly low.

Both large and small financial institutions offer subprime cards.

Co-signed credit cards

If you have bad credit, you can usually get a credit card if someone with good credit cosigns the application.

This person agrees to pay the credit card debt if you should default on it. A person thinking about becoming a co-signer might do well to think long and hard about it, because if you default, the default will show up on the cosigner's credit history. If you max out the card and the cosigner has difficulty paying it off, that can affect his or her credit score for the worse.

Gas cards, store cards

Credit cards offered by gas companies and retail stores are a little easier to get than regular cards.

Their credit limits and interest rates aren't as favorable, but you can use them to charge small amounts and pay them off regularly, thus building credit.

In this July 17, 2018 photo, a customer buys gas with a credit card in Salem, N.H. (AP Photo/Elise Amendola)
In this July 17, 2018 photo, a customer buys gas with a credit card in Salem, N.H. (AP Photo/Elise Amendola)

Companies where you've done business

If a utility, phone, or other company you've had services from offers a card, and you have a good payment history, it may be inclined to offer you a card.

Getting loans

If your credit is bad and you want an auto loan, a personal loan, or a mortgage, you may need to get a cosigner or put up some attractive collateral. Otherwise, you will likely have to wait until your credit improves.

If a personal loan is what you are after, your bank or credit union may give you one if you already have an account or two with them (having a deposit account is a sign of stability that lenders look for; also, many cards require that you have a checking account anyway). They will already have a sense of your financial status. At the least, you may get a small loan or a loan that is secured by one of your accounts.

Summary of how to fix bad credit

All is not lost when your credit goes sour.

No matter how far down the road you have gone, you can go back, and there are plenty of resources to help you get back on the road to credit recovery. Give yourself time and use good credit-building skills. In a matter of months, you can begin to look good to potential lenders.

Practical ideas you can start with today

  • Obtain your credit report from all three credit bureaus once per year.

  • Dispute any mistakes in your credit report and add any missing positive information.

  • If you don't have a credit card, apply for one, even if only from a gas company or retailer.

  • Use your credit card every month. Make small purchases and pay them off to show you can handle credit responsibly.

  • Do not use your card for routine purchases unless you pay your balance in full each month.

  • If your credit is bad, take some initial steps to build it up, such as opening a savings account or getting a retail-store card.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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