How to Clear Up a Bad Credit History

Reader Question: I want to purchase a home sometime during the next year, and I want to clear up my bad credit history first? What should I start with when clearing up my credit?

While we are on the "clear" subject, I'd like to start by clearing up some of the terminology here (for the benefit of all readers). When people talk about their credit history they may be referring to one of two things:

1. The financial decisions and actions they have made over the years.

2. The way this financial activity is being reported, in the form of credit reports.

Item #1 leads to item #2. So both of these things must be considered when discussing the subject of how to clear up a bad credit history. Furthermore, item #2 (your credit reports) are used to compute your credit scores, and lenders use these when considering you for a loan.

Obviously, we cannot erase our financial past. But we can certainly correct the behavior that led to bad credit in the first place. For example, let's say that in the past I had a bad habit of neglecting my bills. I have missed payments for my credit cards, my car loan, and other bills for a period of several months. By law, this negative information can stay on my credit report for up to seven years.

Now let's assume I've become more responsible with my bill payments. It's four years later, and I am planning to buy a home. I want to clear up my bad credit history so I'll have a better chance of getting a mortgage loan. What can I do?

• I cannot change the past, so my delinquent payment situation will still be on my credit report (for a few more years anyway).
• If my financial behavior has improved since then, and I haven't had any delinquent payments in several years, my credit report will reflect this as well.
• It's still wise for me to request copies of my credit reports and clear up any errors that might be on there. These will only hurt my cause.
• Most importantly, I should continue to pay all of my bills on time and make sure I don't rack up too much debt. Over time, this kind of good financial behavior will improve my credit score.

That last item on the list is the most important of all. Even if you have some negative information on your credit reports, it will eventually go away. There are laws that limit the length of time those things can follow you. So if you are financially responsible in the meantime, your overall credit score well steadily rise over time. This makes it easier to qualify for a loan, and it helps you get the best interest rates at the same time. This is the real "secret" to clearing up a bad credit history.

So what have we learned by all this? For one thing, we have learned that you cannot wave a magic wand and clear up a bad credit history instantaneously. Sure, you can (and should) review your credit reports for errors, and dispute those errors to have them removed. And yes, you can certainly change your financial behavior for the better. But the financial mistakes up the past will follow you for 7 - 10 years, depending on what they are. You can certainly improve your credit score over time, by changing that behavior. But you cannot change the past.

Unfortunately, a lot of companies will lie to you and say that they can repair your credit and clear up any bad items from your credit history. Most often, this is just a scam designed to elicit payments from you. The only thing these companies can do is (A) have errors removed from your credit reports and (B) offer advice on how to change bad financial behavior for the better. But they cannot magically clear up the past.