How Many Months Does It Take to Fix Bad Credit?
If you’re planning to take out a new loan, it is smart to fix bad credit first before making inquiries or getting pre-approvals. This increases your chances of approval and getting affordable interest rates.
Bad credit is a term used to describe a credit record that is laden with multiple credit issues, including late payments, loan defaults and maxed-out credit cards. This track record reflects poor financial management skills and irresponsible attitude towards debt, making future lenders adamant on granting loans and giving low interest rates.
The good news is that you can fix bad credit over time. Depending on the severity of the debt issue, the repair and improvement works can take several months or years.
Disputed Errors and Fraudulent Activities – 1 to 3 Months
Not all bad credit records are committed by the borrowers. Sometimes, lenders send false or outdated information to the credit bureaus, negatively hurting the borrower’s credit record. On other occasions, a borrower’s credit card may also be compromised and used by hackers and identity thieves for various purchases until it’s maxed out. This credit card spending, regardless of who’s responsible for it, increases your credit utilisation ratio and tremendously hurts your credit score.
However, false information and records of fraudulent activities that appear on your credit record can be disputed to the credit reporting bureau. The agency has a maximum of 30 days to respond to your dispute letter and conduct an investigation. On some instances, the agency may require more time for the investigation, which extends your case even longer.
If successful, however, the disputed information will be removed from your credit report by the credit bureau. The fix takes effect usually after one to three months after your record is updated.
Hard Inquiries – 12 to 24 Months
Shopping for loans can harm your credit record, although minimally. When you inquire for a loan or get a pre-approval, the lender will pull out your credit record to check your credit history before deciding to grant you the funds or not. This request from a potential lender to access to your credit record gets is labelled as “hard inquiry”.
Unlike a “soft inquiry”, which happens when you request a free copy of your credit profile, a “hard inquiry” hurts your credit record because it suggests that you’re short on cash. While a single hard inquiry has a minimal effect, multiple hard inquiries can make you a high-risk borrower. It suggests to lenders that you’re applying for credit from several lenders and is about to rack up a lot of debt.
A hard inquiry record stays on your credit report for about two years. While you can’t remove it on your profile, it loses impact over time. To avoid getting multiple hard inquiries, however, stay within the 15- to 45-day window time when shopping for loans.
Late Payments – 18 to 24 Months
Delinquency records from previous debts stay on your credit report for seven years. Although they cannot be removed, their impact recedes over time. Once you start making on-time payments on your active debts, your credit score begins to improve, subduing the negative impact of your late payment records even further.
It can take up to 2 years for your credit score to improve after fixing your delinquency records. This is because your payment history is the most important factor in the calculation of your credit score.
Default, Foreclosure, Repossession and Bankruptcy – 84 Months
All records of loan defaults, foreclosures and car repossessions will stay on your credit report for seven years regardless if they are paid or not. After this period, they will be completely lifted and will no longer affect your scores. When these records disappear from your credit report, your credit score will significantly increase in just a month or two.
The seven year-period, however, is a long time. Various emergency expenses and long-term goals can happen during these years, which can be helped by financing.
This is why it is best to avoid committing these issues as much as possible. To avoid foreclosure, car repossession, bankruptcy or loan default without ready money, get a debt consolidation loan.
You might still be able to work out on your default record if you negotiate with your lender early.
- If your lender has not filed the default claim on your credit report yet, pay off your debt in full if you can or at least bring your delinquency to under 270 days.
- Negotiate with your lender to lower your monthly repayment or propose a new payment plan.
- Typically, your loan will be out of the default status after making 9 to 10 consecutive and timely payments.
More Ways to Fix Bad Credit
Apart from fixing the abovementioned factors that weigh heavily on your credit score, there are several other ways to fix bad credit record and boost your credit score.
Reduce the Number of Your Active Loans
Limit your active loans to one or two accounts to minimise your credit utilisation ration. The smart way to do this is to settle the debts that have smaller balances while making minimum payments on accounts with bigger balances. After completing your repayments on the smaller debts, pay off the remaining accounts.
Avoid Spending More Than 30% of Your Credit Card Limit
Using credit cards can help build your credit history, but only if use responsibly. These include paying your monthly balances on time and not spending near the credit limit or maxing it out. The recommended usage is around 30% of the credit card limit or the maximum amount you can spend. Doing so can help lower down your credit utilisation ratio.
Pay Your Bills On Time
Making on-time payments of your utility bills and mobile phone plans has a positive impact on your credit record. Some utility and phone service providers can send overdue bills to a collection agency. When this happens, the collection agency can report your unpaid debt to the credit bureau and affect your credit rating.
Paying your bills on time can also boost your credit score through online tools like Experian Boost and UltraFICO. These platforms link to your online bank accounts and scan your utility and phone payments (Experian Boost) or your savings (UltraFICO). If you pay your bills on time or have regular savings and do not have overdrafts, your credit score will increase.
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