How to Fix Your Credit for Free

There are plenty of services that claim they can get you out of a hole when your credit is in bad shape, but nine times out of ten, they make the problem worse because you end up having to pay them for their dubious "service" on top of all the debt you already had. Before you even consider such a "credit repair" company, there is much you can do on your own to try to improve your credit situation for free.

First, you'll need to obtain a copy of your credit report so you know exactly what you're dealing with.

There are plenty of commercial companies (including one in particular that advertises heavily, and musically, on television) who are eager to act as middlemen in obtaining your credit report for you, but you should bypass them, as they will do everything they can to sell you more dubious credit-related "services" that'll cost you still more money you don't have. In fact, the Fair Credit Reporting Act of 1970 and its various amendments gives you the right to a free copy of your credit report each year. Go to AnnualCreditReport.com, which is the source authorized by the Federal Trade Commission (FTC). There you will be able to obtain your current credit report from each of the three main credit bureaus (Equifax, Experian, and TransUnion).

Examine your reports carefully and take note of every negative item. Make separate lists of the damaging items that are inaccurate and shouldn't be on your report (errors are very common on credit reports), and the damaging entries that, unfortunately, are deserved.

For any errors you find on one or more of your reports, the law gives you the right to challenge these with the credit bureau. Inform them in writing of the error, enclosing copies (not your originals) of any relevant documentation you might have that shows the entry is inaccurate.

The credit bureau must then investigate the matter and inform you of their findings, generally within thirty days. If you do not receive satisfaction from them, you may also pursue the matter with the creditor. If the creditor agrees you don't owe them any money, they must inform the credit bureau of this.

Next you need to deal as best you can with the legitimate negative entries on your report. Try to work directly with your creditors. Avoiding them isn't going to do you any good. If you are behind on an account or about to fall behind, contact the creditor directly and try to work out the best deal you can. Explain your financial situation and what you're doing to correct it. Offer to pay the most you realistically can.

Obviously they have the leverage in that they can refuse to negotiate with you and let the delinquent account ruin your credit if you don't pay. But on the other hand, it's not like ruining your credit is helping them. If you can convince them that the most they're going to be able to get out of you is a certain amount, then they'd rather have that than nothing. The last thing they want is for you to declare bankruptcy in a way that leaves them out in the cold.

If you do come to an agreement with them, be sure to get everything in writing. If you talk to someone on the phone who agrees to a deal, make sure they can't later deny that ever happened.

On your credit report, you lose points for being maxed out, or especially being over the maximum, on an account. So give priority to paying on the accounts that are at or near their credit limit. If you have two cards with a $5,000 limit, and you owe the full $5,000 on one and $1,500 on the other, focus on getting the one with the $5,000 balance paid down a bit.

If one of the things that's gotten you into trouble is lack of discipline with credit cards, cut up the cards. Or cut up all but one, and keep the one locked away somewhere for emergencies only. One trick some people have suggested is dropping it into a container of water and freezing it in your freezer, so it's inconvenient to get at and psychologically feels like a bigger deal.

Don't necessarily close all the accounts you don't intend to use though. A sudden flurry of account closings, even if initiated by the consumer and not the creditor, is bad for your credit score. So keep some open. All else being equal, keep your longest running accounts open.

On the other hand, if you can use credit with discipline, you may want to go in the other direction and obtain new credit. Depending on how bad your credit is, you may only be able to get a secured credit card (which is more like a gift card; you pay the limit up front, and then you can charge on the card up to that amount). That way as you're trying to do something about the bad credit on your report, you're simultaneously adding good credit in the form of a new account that you keep in good standing.

In addition to dealing with your credit and your credit report directly in these ways, of course it also may be that the main thing you need to do to improve your credit is to step back and examine whether you're living beyond your means. You may need another job, some belt tightening, or just more self-discipline in general to turn this thing around so that you're paying off debt as time goes on and improving your position, rather than sinking deeper and deeper and further ruining your credit.