Much of the information on credit repair can be overwhelming. There is a lot of information out there in regards to credit repair and it is difficult to operate in society with bad credit. Many people struggle with getting a job, finding a home for rent or getting reliable transportation without knowing credit repair facts.
People with a negative past credit history may seek out credit repair facts and tips to improve their credit history. It can definitely affect your life negatively and may even keep you from getting a job. As you start the process of repairing your credit you need to evaluate the best options for you. We want to go over the most important things to know about credit repair before you start the process. You will want to learn about the system and how it works so you know your rights.
1. You can do credit repair yourself.
Now more than ever, it is very easy to dispute errors on your credit report. Repairing your credit is no longer about sending tons of letters through the US Postal Service. The internet gives you direct access. The three reporting bureaus allow you online access so you can view and dispute incorrect items on your credit report.
Some people will hire a professional credit repair company to help them. There are credit repair companies that are reputable so this is an option for some people. But for the most part, there is nothing a credit repair company can do for you that you can not do for yourself. You can find plenty of information available on government and financial websites on the internet that you can use to help educate yourself on how credit works. This will assist you in what you can do to repair your own credit.
You can remove negative information with techniques like credit report disputes and sending letters to your creditors. These are the same strategies credit repair companies use to get negative information removed from your credit report. Doing it yourself not only saves you money but also educates you which gives you the power and control over your own credit file. It will also help you to manage your credit in a positive way. Once you know the credit repair tactics that are available to you, you can use them anytime in the future if it becomes necessary.
2. You can check your credit score and credit reports for free.
Once you have your account information in front of you there are three main ways to check your FICO credit score for free. You will be asked information about your past credit history so it is important that you know your past payment amounts and account information to get through the security process. Another option is that you can ask your credit card company. You can request your credit score through your bank, or sign up for several free online services. You are also entitled to one free credit report from Experian, TransUnion and Equifax per year. Request your free reports from Annual Credit Report.
3. Having a good credit file can save you money over time.
Many people do not realize that having bad credit can cost you thousands of dollars over time. You also may be jeopardizing your career if you have negative marks on your credit report.
Having a good credit file can help you save money in the following ways:
- Reduced insurance rates
- Lower cost of capital for personal loans
- Improved interest rate offers from credit card companies
- Utility companies such as gas, water and electricity may waive connection fees or deposits
- Waived deposits on rental units such as boats, RVs and apartments
- Free or reduced-rate mobile devices and deposits
4. Checking your own score will not lower it.
There is a myth that checking your credit score hurts your credit, but this is not necessarily true. When you order your credit report or if you are checking your score with a soft inquiry does not affect your credit score. However, hard inquiries, like when lenders pull your credit, will negatively impact your score. If you do have a hard pull the score does not drop for long. The consequences are not that great especially if the requests are made during a specific time frame as in 30 days, or within a short amount of time.
5. Your credit score is based on five important factors.
You will need to know the five factors that have an impact on your FICO score. Each of the factors represents varying percentages of your credit score. You want to remember these factors when managing your credit. As an example, there is a popular belief that carrying a balance will improve your credit score. It can actually damage your score and increase your debt. You can review these five factors that impact your score below.
- 35% – Payment History. You mush show your ability to consistently make payments. This has the biggest impact on your score. Making late or missing payments will be the most detrimental thing you can do to your credit score.
- 30% – Credit Utilization. You do not want to have your balance exceed 30% of your credit limit. Credit utilization is determined by the amount of credit you’re using compared to the total credit line you have available. The lower your balance vs your limit, preferably below 30%, the better your score. Keeping your balance below 10% is even better.
- 15% – Length of Credit History. The longer your good credit history is the better picture it gives the reporting bureaus of financial habits. transactions. Your past behavior allows them to predict your future behavior and how you will handle your credit. This helps lenders to determine your potential risk.
- 10% – Inquiries and New Credit. Having a large number of lender inquiries to review your credit report can affect your score negatively as well. Inquiries made during a short amount of time are generally less harmful since the credit bureaus understand you may be shopping for a loan like when you are looking to make a large purchase like a car.
- 10% – Diversification of Credit. Lastly, multiple types of credit lines make up the last area that impacts your score. You want to show lenders you can responsibly handle different types of available credit.
These are the five categories of information that your credit score is based on. Equally improving each of these categories will boost your credit score.
6. Credit repair is not just about raising your credit score.
When you’re repairing your credit, you may watch for your credit score to go up. But credit repair is about improving the information on your credit report, not your score. This is what actually influences whether you have good or bad credit and is the foundation of your credit score.
Checking your credit report is the first thing you should do when you’re ready to start working on your credit so you can see the information that’s hurting your credit. You can get a free copy of your credit report once a year from each of the major credit bureaus — Equifax, Experian, and TransUnion — by visiting www.annualcreditreport.com.
7. The majority of lenders use FICO Credit scores not VantageScore
Bill Fair and Earl Isaac founded the FICO credit scoring system in 1956 as a way to help lenders understand their risk and make well-informed lending decisions. FICO analyzes scores from the three major bureaus: TransUnion, Equifax and Experian.
Many “free” scores that are offered are actually called a VantageScore. The three credit reporting bureaus came together to create a FICO competitor VantageScore to offer a more consistent score across the three bureaus. I have had several clients at the bank call me and ask why our score is lower than the score they are seeing online. That is because they are looking at the VantageScore and the bank is using a FICO score.
90% of lenders use your FICO score when making lending decisions.
8. FICO credit scores can range from 300 to 850.
Credit score ranges vary depending on the credit bureau you are looking at. Knowing your score can help you understand how you can improve it. For example, if you’re looking to move from “fair” to “good,” it’s important to know where those scores lie on the spectrum. Below you can find the credit ranges used by FICO.
- 800–850: Exceptional
- 740–799: Very Good
- 670–739: Good
- 580–669: Fair
- 300–579: Poor
9. You have more than one credit score.
Credit scores vary based on the credit bureau reporting them because not all creditors report to all three bureaus. The major credit bureaus all have slightly different information regarding your credit history. This means that several FICO credit scores are reported to lenders to account for the different information they have collected.
There are also different scores specific to particular industries. For example, auto lenders review different risk factors than mortgage lenders, so the scores each lender receives differ. Mortgage lenders actually use what is called a Tri-Merge Credit Report which merges the information from the three bureaus.
10. Your credit score helps you to see where you stand.
Whether you have a good or bad credit score, it is based on the information in your credit report. However, just looking at your credit does not tell you much. It is difficult to look at your credit report and tell whether your credit is good or bad. Your score is the guide. This is why watching your credit score is something you should do on a regular basis. A low credit score indicates a credit history that needs work. Once your credit score improves, it’s an indication that your credit history is also improving.
In order to see your FICO credit score like the banks do you will need to pay for it. Purchasing your credit score each time you want to see where you stand can get expensive. Using a free credit score service like Credit Karma or Credit Sesame will allow you to monitor your credit progress with VantageScore at no cost.
When you’re signing up for a credit monitoring service, look for one that doesn’t ask for a credit card. Otherwise, there’s a chance you may be actually signing up for a free trial subscription that will begin charging you each month if you don’t cancel the subscription.
11. Lenders use more than your credit score to make a lending decision.
Lenders use more than just your score to determine if they will extend credit. Other aspects of a person’s financial story can impact a lender’s decision to grant you a loan or a credit card. Factors like a steady job and enough income can also demonstrate your ability to pay back a loan. They will also use data from your credit report. As an example, if you have a 720 score but you had a late payment in the past year, you may still be denied credit. It does not matter if your credit score meets the scoring guideline in there are other negative factors.
12. Joint accounts affect your credit score.
The activity on a joint account is reflected in both credit reports. A joint account is different than an account with an authorized user. Joint account holders can use the account and are liable for the debt, while authorized users can use the account but are not liable for the debt.
For example, if you add your spouse to a credit card your credit history will be on your spouse’s credit report. This is called adding an authorized user. This does not mean that you and your spouse have a merged or joint credit score.
13. Removing accurate negative information can be difficult.
Many people will fall into scams that will tell them they can remove accurate information from their credit reports. Although it can happen it is unlikely. When accurately reported negative information hurts your credit, it’s harder to remove this information because the credit bureaus and the lenders are within their rights to report it. The lenders depend on the accuracy of the credit system so they can make informed decisions.
Credit bureaus are only legally obligated to remove inaccurately reported information from your credit report. It doesn’t matter whether those inaccuracies are positive or negative. It’s the fact the information is inaccurate that allows you to remove it from your credit report, not that it’s negative.
There are some strategies to remove accurate negative information. In the instance of a collection account for a debt, you legitimately owe you can negotiate a goodwill deletion. These strategies may take more time and effort than a simple credit report dispute. You will have to call the creditor to start the process. Sometimes it can happen fairly quickly but it will take time for their reporting to update once everything goes through. For these types of accounts, pay for delete, and goodwill deletion requests are a great option.
14. Doing nothing may be the perfect strategy.
Sometimes, just allowing time to pass is the perfect thing to do. Negative information does not stay on your credit report for more than seven years in most cases. There are a few exceptions to that rule. Bankruptcy, judgments and unpaid tax liens can stay on your credit report for up to 10 years or more depending on the state where you reside.
If an account is nearing the credit reporting time limit of 7 years, waiting for it to fall off may be less time-consuming than trying to have the account removed with dispute letters or other strategies.
It may not be impacting your score as much as you think it is at this point anyway. If you pay off a six-year-old debt collection it will still drop off your credit report after year seven. Some newer versions of the FICO and VantageScore do not include paid collections in your credit score at all.
15. Closing negative accounts will not help.
There is a common myth that only open accounts are included in a person’s credit report, that closing an account will remove it from their credit report. If you were hoping that you can save your credit by closing an account that’s giving you problems, it simply will not help. In some cases, closing an account can actually hurt your credit score.
Closing an account will not remove it from your credit report and all of the details will remain on your report for 7 years from the last activity. You should take into consideration other factors that comprise credit scores, such as the length of time the account has been opened. Starting new credit accounts with a bad score can be difficult so it is a better practice to rectify any issues and leave the account open.
16. Beware of shady credit repair companies.
Some credit repair companies do a great job of promoting their services to desperate consumers who want better credit. Most of these consumers do not understand how credit works or how much influence they have over their own credit scores. Make sure you are using a reputable credit repair company with a national presence.
Some credit repair companies make promises they can not fulfill. They will charge upfront fees. Eventually, they fail to deliver on their services. All these are prohibited by Federal law, but consumers who are unfamiliar with the law wouldn’t realize they were being taken advantage of until it’s too late.
Over the past several years, the Federal Trade Commission has pursued dozens of credit repair companies who have broken these laws. The companies are often required to pay hefty fines. In some cases, they are banned from doing business in the credit repair industry.
A few signs you’re dealing with a shady credit repair company:
- they charge you upfront fees before any services begin
- cite an affiliation or special relationship with the credit bureaus
- promise a specific credit score
- promise to delete accurate information from your credit report
- fail to inform you of your right to dispute information directly with the credit bureaus without paying for assistance
- ask you to waive your rights under the Credit Repair Organizations Act
17. You may not see immediate results.
It takes time to rebuild and restore past credit issues that are accurate. Your credit score considers your most recent credit history more than older items. Good credit history will only have a minimal number of past negative marks and more recently lots of positive credit information. Making on-time payments now is a step in the right direction, but it takes time. As time passes and the negative information falls off or gets older, and you replace it with positive information, you will see your credit gradually improve.
Repairing bad credit takes time, so it’s important to be patient. Starting as soon as possible is ideal. The amount of time it takes can vary from person to person depending on the information on your credit report and how you’re going about repairing your credit. New credit card approvals or an old account falling off can offer a boost to your score.
Your credit score may fluctuate during the credit repair process as the information in your credit report changes. It is important not to be alarmed by drops in your score. Focus instead on the long game of credit score restoration. Not on the daily fluctuations.
18. You must change your habits.
Many people go through credit repair so they can borrow money, for a mortgage or auto loan, for example. Many people will also find themselves back in the same situation within a few months or a few years. They do not borrow responsibly and end up with more debt than they can handle. The cycle of slow payments and eventually default may happen.
If you want good credit to be long term, you will want to adopt good financial habits. This means borrowing only what you can realistically afford to pay back. Paying your bills on time is perhaps one of the best things you can do for your credit.
One habit I tried to teach my kids was this: before you buy that car, make sure you are saving the car payment for a few months so you can see what it feels like to pay it every month. This will help you to get a realistic feel for what it will do to your finances if you choose to make that large purchase. If you can not save that car payment every month then you should most likely hold off until you are able to comfortably save the money.
19. You can still get a loan and credit cards with bad credit.
Bad credit loans and credit cards are available for those with low or non-existent credit scores. Depending on the type of loan, you might need to pay high-interest rates and offer a valuable asset that a lender can seize if you’re unable to pay back the loan.
20. Monitoring your credit report can help you spot fraud.
Periodically checking your credit report allows you to spot fraudulent activity. Services such as Credit Karma and others offer credit report monitoring which will alert you to any new credit requests. Any large changes in your score are signals to check your report for any inaccurate information. Once you see any inquiries on your report you should double-check to make sure they match up to your recent activity. You will want to authorize a credit freeze and add a fraud alert to your credit report.
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