Less-than-perfect credit can be fixed, but the first step is to face down your enemy — the negative items that muck up credit and drag down scores.
Here are the seven worst items you can have on your credit, along with advice on how to bounce back from each one.
“A bankruptcy is the biggest black mark you can have on your credit,” says Wayne Sanford, aka “Wayne the Credit Guy,” a credit expert with New Start Financial. The hit to your credit score from a bankruptcy depends on your individual situation, and a bankruptcy will have a less dramatic effect on credit that’s already tanked. But FICO’s score simulator shows that a bankruptcy could cause a 750 score to plummet more than 150 points into the 500s.
How to bounce back: A Chapter 7 bankruptcy, in which you walk away from most debts, stays on your credit for 10 years. A Chapter 13, in which you create a repayment plan, remains for seven years.
“That’s when you can rejoin the prime credit universe,” says Cristian deRitis, senior director at Moody’s Analytics. In the meantime, get a secured credit card, use it for small purchases and pay the bill in full each month to start rebuilding credit. And pay all of your bills on time because it’s especially important to avoid additional negative marks, deRitis says.
2. A home foreclosure
A foreclosure might not be quite as bad as a bankruptcy, but it’s close, according to Experian. And foreclosure “alternatives,” such as doing a short sale of your home or offering the bank a deed-in-lieu of foreclosure, can hurt your score just as much, according to FICO. Foreclosure typically prevents you from being able to buy another home for at least three years, Sanford says.
How to bounce back: “Time is the best medicine,” deRitis says.
While a foreclosure will stay on your credit report for seven years, your score can begin to recover in just two years, according to FICO. If you want to try for another mortgage after the three-year mark, it might help to show the lender evidence that a past financial hardship like a job loss contributed to your foreclosure, deRitis says.
3. An auto repo
A car repossession can hurt your credit almost as badly as a foreclosure and can temporarily prevent you from getting a loan to buy another set of wheels. A repo on your report is “of primary concern for auto lenders,” Sanford says.
How to bounce back: A car repo stays on your credit for seven years, but you might be able to qualify for an auto loan at a reasonable interest rate in a couple of years if you diligently pay your bills on time and avoid maxing out credit cards. Consider visiting a nonprofit credit counseling agency if you need help recovering from a car repossession or figuring out how to budget for an affordable used vehicle to get you to and from work.
4. A charge-off
If you stop paying on a credit card or loan, your creditor will eventually take that debt off the books and give up on trying to collect. That’s called a charge-off, and it typically happens after about six months of failure to make even the minimum payment, Sanford says. “A charge-off is a big sign of financial instability,” he says.
How to bounce back: First, know that a charge off doesn’t remove your obligation to pay. If the debt hasn’t yet been sold to a collection agency, you still owe the money to your original lender. Consider paying if you can because, while paying won’t remove the charge-off from your credit, it will change the designation to “charge-off paid,” according to Experian. That won’t result in an immediate score boost, but it will help nudge your score upward over time. And, more importantly, it will make you look better to lenders.
5. A collection
If you fail to pay on a credit card, personal loan, utility bill or other debt, the lender might sell the account to a collection agency that reports to the major credit bureaus. If that happens, a collection shows up on your credit report, where it stays for about seven years, dragging down your score.
How to bounce back: Before making a payment on a collection account, consider whether your payment could revive an old debt that’s nearing the statute of limitations, the time after which a bill collector can no longer sue. Some consumers try a questionable tactic known as pay-for-delete, in which they offer to pay the debt in exchange for getting the collection removed from their credit. However, this goes against credit bureau rules, and collection agencies typically say no. On the bright side, the newest version of the FICO score (FICO 9) doesn’t factor in third-party collection accounts that have been paid off and also gives less weight to medical collections. It’s important to note, though, that version of the score is not yet widely in use by lenders.
6. A judgment or tax lien
Judgments and tax liens are two types of public records that can appear on your credit report and hurt your score. A judgment stays on your credit seven years after the judgment date, while a tax lien can stay on for 10 or even indefinitely if it’s Uncle Sam you owe. And these obligations may have to be paid before you can get approved for a mortgage, says Randall Yates, CEO of The Lenders Network.
How to bounce back: You might have a shot at getting these records removed from your credit report. As of July 1, 2017, the major credit bureaus should no longer report public record data that doesn’t include a name, address and either Social Security number or date of birth. If your public record lacks this information, it might get automatically removed from your credit history. If not, you might have to contact the credit bureaus to give them a nudge, Sanford says. And if you have a federal tax lien on your credit and you qualify for the IRS Fresh Start program, you can pay what you owe or enter into an installment agreement, then file a request for the IRS to withdraw the tax lien.
7. Late payments
A late payment definitely dings your credit, but the effect can be mild or devastating depending on how many delinquent payments you have and how late you paid. For example, FICO’s score simulator shows that one late payment could cause a score of 750 to plummet by 45 points, but several late payments could cause a drop of 70 points. Late payments stay on your credit for seven years, but the impact diminishes over time.
“How you paid your bills five years ago is not nearly as important as how you paid them five months ago,” Sanford says.
How to bounce back: The best and only antidote for late payments is to start paying on time.
“If you have a slew of late payments, you need six months of on-time payments to begin to recover,” Sanford says.
Pay every bill on time for a year before trying to get any new credit.
“The lender has to see that, yeah, you’ve had some problems but look how well you’ve done since,” Sanford says.
If you have any of these negative items on your credit, know that time and positive action will help.
“Credit scores are constantly changing,” Yates says. “Just keep making payments on time and things will get better.”