Six Ways to Repair Your Credit
In a time where foreclosure rates are steadily rising, gas prices are higher than ever, and COLA payments have yet to rise to meet the actual cost of living, many Americans are pulling out their bank statements and credit card bills trying to analyze where they’ve gone wrong. More than that, they are trying to find a way to get back on track. Where should they start?
The first place to start, when trying to undo damage to your credit, is to find out what your credit score is and then finding out why this score is so important.
Simply stated, your credit score, or FICO score, is a measure of your credit history. It is arguably one of the most important pieces of information in your financial life. The reason this score is so important is because it can be the deciding factor for if you get approved for a loan or not, if a landlord will accept you as a renter, and even if an employer will hire you. The higher your FICO score is the more appealing you are to lenders. This can make a difference in what interest rates and loan terms you will be offered, which, in turn, can save or cost you money. A low FICO score can even mean you are unable to get a loan to purchase a car, a house, or even take out a small loan for home repairs.
Credit scores range from 300-900. These numbers basically represent your credit worthiness. The higher your score, the more financially responsible you are deemed to be. Most people’s scores fall somewhere in the middle, between 600 and 700. If you apply for a home mortgage loan and the lender does a credit check and sees that you only score a 450, the chances of you being trusted by the lender to pay your monthly payments is quite low. Meaning, you will likely not be approved for a loan. However, if your credit check reveals a 750, this number will be much more reassuring to any lender entrusting a sum of money to you. This credit score number shows that you have been financially responsible, and are of low risk.
You should check your credit score once a year. Doing this can help make sure your identity has not been compromised and to be sure no mistakes have been made that will negatively impact your credit rating. Checking your FICO credit score does not hurt your credit rating. Inquiries made by a consumer about his or her own credit score do not count in any way towards lowering or raising one’s credit score, however, having credit card companies or mortgage lenders do more thorough investigations into your credit rating, does count. Other things that effect your credit score would be every time you apply for any sort of financing, housing, insurance, employment, etc., and your credit report is pulled. Each credit inquiry can lower your rating by five points. The way to keep this from negatively impacting your credit score is to make sure that any inquiries that are made are done within the same 14-day period. FICO scoring system counts this as just one inquiry, and all inquiries made within 30 days of the credit score being calculated are ignored.
Here is a quick checklist of things to remember regarding knowing your credit score.
1. Your credit score is vitally important – know it.
2. Scores range from 300-900. The higher, the better.
3. Check credit score once a year.
4. Checking your own credit score does not impact your rating.
5. Having credit card companies or lenders pull your credit score for further inquiries can impact rating.
6. Do all inquiries in a 14-day time span to avoid negative hits on your score.
When researching how to check your credit score, you need to keep “The Big Three” in mind. The Big Three are credit information reporting agencies, Equifax, Experian, and TransUnion, that have created the single system in a move designed, they say, to make it easier to apply for a loan. Each of them will send you a free credit report, once a year. To contact them for a free credit report, look to the following:
Equifax
phone – 1-800-685-1111
by mail – Equifax Credit Information Services, Inc.
P.O. Box 740241
Atlanta, GA 30374
online – www.equifax.com
Experian
phone – 1-888-397-3742
by mail – P.O. Box 2104
Allen, TX 75013-2104
online – www.experian.com
TransUnion
phone – 1-877-322-8228
by mail – Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
(send completed form found on website)
online – www.truecredit.com
You may be unsure of what is actually in your credit report. Your credit report includes:
Personal Information. This typically includes your name, date of birth, social security number, current and recent addresses, and current and previous employers.
Credit History. Your credit history consists of the details about credit accounts that were opened in your name or accounts that list you as an authorized user. Depending on the manner in which they were paid, closed or inactive accounts stay on your report for 7 to 11 years from the date of their last activity.
Credit Report Inquiries. An inquiry is recorded whenever your credit report is given to another party, such as a lender or landlord. These inquiries can remain on your report for up to two years.
Public Records. Most public record information stays on your credit report for 7 years and can include public records obtained from government sources such as courts of law. This can include liens, bankruptcies, and overdue child support.
Important things to look at in your credit report are payments you have been charged as being delinquent , whether from administrative error or from lack of payment, errors in spelling of your name or other important factors such as your social security number, and negative hits from charges that you were unaware of and may be the result of identity theft. All of these things can impact your score negatively.
Here is a checklist of things to remember about getting your credit score:
1. Contact one of “The Big Three” for a free credit report.
2. The Big Three consists of: Equifax, Experian, and TransUnion
3. Carefully examine your credit report for errors and all things negatively impacting score.
Once you have reviewed your credit report, it is vital to correct errors that are listed. Remember, your credit score can impact your entire life. It is extremely important to do all you can to make that three-digit number as high as possible.
Things that are listed that are “your fault”, such as late payments, can stick with you for years to come. Late payments and charged-off accounts remain on your report for seven years; bankruptcies for 10. Does this mean that if you had one late payment, three years ago, that you will be turned down for a loan? Probably not. Most creditors look for a pattern of payment rather than focusing on a one-time, or rare, occurrence. If you have a few blemishes on your report due to late payments, the single best way to start rebuilding your credit rating is to pay your bills on time. Your recent payment history will carry more weight than what happened 3 years ago. Keep in mind that missing just ONE month’s payments on anything can bring your credit score down by 50 to 100 points. Make arrangements where you must, and start making all of your payments on time.
Some times hard hits on your credit score are due to no fault of your own. Errors on a credit report occur with alarming frequency. Reporting agencies rarely verify or cross check information they are given. It is the obligation of each individual to verify the information on their own credit report and then begin the process of correcting mistakes.
Identity theft is another circumstance in which your credit can be destroyed, by no fault of your own. Identity theft occurs when someone steels your personal information, takes on your identity, and impersonates you in order to open credit accounts, rent apartments, or even engage in criminal acts. Personal information commonly stolen to take on someone else’s identity include: social security numbers, driver’s license numbers, ATM cards, telephone calling cards, credit card numbers, and other key pieces of an individual’s identity. Identity theft is, on average, not discovered until 14 months after it has occurred. This is substantial time for the thief to wreck havoc on the victim’s credit standing. If you become the victim of identity theft, contact the fraud division of the three credit reporting agencies to let them know:
Equifax – 800-525-6285
Experian – 888-397-3742
TransUnion – 800-680-7289
Next you should do the following:
– Request a “fraud alert” be put on your file.
– File a report with local police and make sure to get a copy.
– Contact each credit grantor of a fraudulent account and make them aware you did not open it. Have them close the account. Any new accounts you open should have passwords places on them.
– Call the Identity Theft Toll-Free Hotline 1-877-438-4338.
– Document all of these contacts with dates, names, and phone numbers for your records.
You have the right to dispute any misinformation on your credit report. The contact information for each of your creditors is listed at the end of your credit report.
Here is a quick checklist of actions to take to fix errors in your credit report:
1. Resolve any late payments due to fault of your own
2. Review credit report and check for signs of identity theft or other errors.
3. If identity theft or administrative errors are discovered, take immediate action.
The best way to repair your credit is to manage your outstanding debt. Your credit report is broken down into percentages. Payment History makes up 35% of your score, Amounts Owed is 30%, Length of Credit History is 15%, New Credit is 10%, and Types of Credit Used is 10%. As you can see, your payment history and the amounts you now owe make up a staggering 65% of your credit score. Keeping your payments on-time and paying down current debt are vital to repairing your credit.
Paying down current debt can be very overwhelming. Once you become behind on any payments, the late fees, interest charges, and the general pile-up can seem impossible to hurdle over. Getting a plan together and becoming proactive are the first steps to tackling your debt. The basics for debt reduction are simple: cut down on unnecessary spending and put the extra money toward your debt payments. Figure up how much money you waste on these unnecessary things each month and you can determine the maximum amount of money you have on hand to pay off your debts. Pay down the debt with the highest interest rate first, typically this is your credit cards, and continue paying at least the minimum amount due on all other revolving bills. Once the highest interest rate debt is depleted, move on to the next one. The one exception to this rule is if you have a credit card with a low “teaser” rate. This means the low interest rate only lasts a short amount of time and will jump substantially when the time limit has expired. For this reason, be careful when switching to a zero or lower interest rate care for the purpose of paying off debt more quickly.
If you are simply unable to do these things on your own, there are resources available to help you. Credit Counseling Organizations are often nonprofit and work with you to solve your financial problems. Be aware that just because an organization claims to be “nonprofit,” that doesn’t mean that its services are free or even legitimate.
Debt Management Plans can be recommended by credit counseling agencies, when your financial problems stem from too much debt or your inability to repay your debts. DMPs are not credit counselors and are not for everyone. Only sign up for one of these plans after a certified credit counselor has spent time reviewing your financial situation.
Debt Consolidation is when you take out one loan to pay off other debts. This way you consolidate the money you owe into one payment. Be careful not to get into higher interest rates when consolidating debts. The best places to look for debt consolidation programs are:
-Local credit unions or banks in which you already have a relationship with.
-Banks you don’t have relationships with. They might offer good deals in order to win your business.
-Mailers offering programs. They already want your business. Only work with reputable institutions.
Bankruptcy is the debt management option of last resort. This gives you a court order saying you do not have to pay certain debts. This stays on your credit report for 10 years and can make it difficult to obtain credit, buy a home, or even get a job. Still, it does offer a legal way to make a fresh start if no other option will work.
One of the easiest ways to help yourself get out of debt more quickly is to pick up the phone and call your credit card companies. Simply asking them to lower interest rates and wave late fees is often all it takes for them to do so. If asking doesn’t work, call again on a different day. You will talk to a different person that might be more willing to help. If they refuse you help, it might be time to switch to another company and close the account.
Here is a quick rundown of how to mange your outstanding debt:
1. Find wasted money in your budget and use it all towards debt.
2. Pay off highest interest rates first.
3. Negotiate with debtors to lower or consolidate your debt.
4. Call creditors to lower interest rates and wipe away late fees.
So, once you’re working on repairing your credit score, should you open new credit? The short answer is: it depends. If you have one credit card that has 50% or more of its value used, it might be a good idea to open a new account with a low interest rate card, or increase the credit limit of your current card. Reason being, keeping your balance below 50% of the maximum amount available will increase your credit score. Spreading the debt to two cards, and not putting more on either card, will put you in the 25% range on both cards, thus increasing your credit score. Choosing a secured or unsecured card will not effect your credit score, just choose the one that best suits your situation. Watch out for fees associated with cards, such as annual fees, late payment fees, set-up fees, etc. Keep your balances low, and don’t open too many credit cards, as this can lower your credit score. Do not open new credit lines if you already have several that you are poorly managing.
Here is a short list of suggestions to opening new credit:
1. Keep balance below 50% of allowed limit
2. Spread balance to other cards to keep percentage low.
3. Do not open new credit if your current credit management is poor.
Once you get on track, stay there. Make sure to request a yearly copy of your credit report and examine it thoroughly. Be vigilant by requesting help from a monitoring service. A credit monitoring service will alert you, usually daily or weekly, to changes in your credit helping you to stop the theft before it gets out of control and ruins your newly earned credit score.
So, let’s review what we’ve just discussed about six ways to repair your credit.
1. Get your credit report.
2. Review it for mistakes.
3. Fix all errors, yours or others, immediately.
4. Manage your outstanding debt.
5. Open new credit where needed.
6. Keep watchful eye on credit reports in the future.
These six steps combined can have you on your way to a much higher credit rating, and a much better financial future.