Repairing credit may seem difficult at first but following a few simple steps can help.
Know your credit score: How do you find out what your credit score is?
The 3 main companies holding credit reports are Equifax, Experian and Trans Union. There are other smaller companies which also hold the information but these three companies are the most likely to hold substantial, comprehensive information. Smaller companies often only have limited information.
What is a credit score?
This is the most significant way in which lenders assess your financial status and lending risk. A low score is likely to mean that it is difficult to obtain credit. A credit score is assessed by taking a number of factors into account. Lenders will do this in order to determine your ability to make repayments and to assess any risk of you not being able to pay. In determining your credit score, the following factors are likely to be taken into account:
1. Working status (employed, self employed, etc. and your annual income)
2. Existing credit commitments (a lack of credit history can be disadvantageous as there is nothing to show your ability to make repayments; having several financial commitments or difficulties in paying existing creditors may make obtaining credit difficult)
3. How long you have lived at the same address
4. Other information pertaining to credit such as defaults and bankruptcy
5. Links to other people (eg. if you have applied for joint credit with another person, your report will be connected to theirs)
Different companies may use other information to determine your credit score, which is, in simple terms, a three digit number; the higher the number, the more likely you are to be granted credit and to get the best deals for interest rates.
This number is a more efficient way of checking whether a company considers an applicant low risk or high risk, as opposed to checking manually through a full report. Systems for the big three credit scoring companies are based on “FICO” which is the original credit scoring system named for the company which originated it, Fair Isaac and Company.
The range for a credit score is between 350 and 800 according to the FICO system, although some companies may use any range of numbers between 0 and 1000. Whichever system is used, the higher the score, the more likely you are to obtain credit and/or get lower rates of interest on financial products.
According to FICO, the average credit score is 723 which meaning the “average” citizen should be able to obtain a reasonable amount of credit at a fair rate. Having a very low score will make it difficult and having a very high score will mean you are almost guaranteed to be granted credit at a low rate.
Why is it important to know your score?
Lenders need to find out whether an applicant for a financial product will be a risk to them and to determine how much to charge for credit or whether to provide it at all but why is it important for us to be aware of our own credit scores?
We should check our own credit scores regularly. It is important to know where we stand with lenders, whether we are likely to obtain credit and how much and it allows us access to information which may help to find where we can make improvements to our credit score.
It is also important to keep checking our credit scores because of the possibility of fraud. Someone else could apply for credit in our name, should this credit be granted and the fraudster not make the repayments, the named applicant is liable for the debt, therefore, it is important to ensure that there is no false information held on any credit database.
FICO recommends checking your personal credit report a minimum of once per year.
Checking your own credit report has no affect on your credit score. Companies expect to find several credit applications although there are a lot of companies who will not consider you if you have been turned down for credit in a certain period of time, usually between one month and three months.
The big three credit companies are as follows:
1. Trans Union
You can obtain a free credit report from Trans Union on-line at www.truecredit.com or www.annualcreditreport.com for a free annual report
You can obtain a report by ‘phone on 1-877-322-8228 or by post by downloading the mail order form from the website. (USA only)
Experian offer a free trial report which is limited and only accessible for a short period, after this, or if you require more information, you will have to pay a small fee.
You can also order your credit report by ‘phone or mail:
Equifax Credit Information Services, Inc.
Atlanta, GA 30374
Usually, requesting a credit report on-line should result in immediate access although requesting a paper report will take longer.
What to look for in a credit report:
A credit report may appear to contain a lot of information but the following is a guide to what you should really be looking for.
1. Accurate personal information: If your personal information on a credit report is incorrect or missing then this may affect your credit score.
2. Previous accounts: Credit report will detail all the credit taken out in the past, including any late payments and defaulted credit accounts. It is essential that these are checked for potential errors.
3. Current and previous address information: When applying for a report, you will be required to provide your current address and, depending on the company and the time at your current address, you may be asked for previous addresses for yourself and anyone else with whom you intend to obtain credit.
4. Conduct of accounts: the report will detail how accounts have been handled including the number of late or missed payments during the life of the account.
What if there are errors in the report?
If you wish to dispute anything on your credit report, you should contact the company which has given you the report in order to alert them of any concerns such as fraud or administrative errors. You should also contact any company on the report which you do not recognize or which you have concerns pertaining to the account. The company information should be on the report although you should be able to ask the credit report providers for help in obtaining company information if necessary.
If your dispute is administrative then this should be resolved quickly, usually within around 7 to 10 working days. However, if your dispute is more sensitive eg. suspected fraud, it will take longer and will depend on each individual company which is involved in the dispute.
In any case, a note should be attached to the report in order that other potential lenders will see that the account is in dispute.
Contacts in the even of dispute:
On-line at https://annualcreditreport.transunion.com/entry/disputeonline or, if you suspect fraud, http://www.transunion.com/sites/corporate/personal/fraudIdentityTheft.page
‘phone on 1-800-916-8800 (for a dispute) or 1-800-680-7289 (for fraud victim assistance)
Trans Union Fraud Victim Assistance Department
P.O. Box 6790
Fullerton, CA 92834
For a dispute, you would need to download a mail order form using the link within the “contact us” section of the website.
direct web link: https://www.experian.com/consumer/cac/InvalidateSession.do?code=SECURITYALERT
In summary, to fix errors which may occur within your credit report, you would need to take the following steps:
1. Thoroughly check the report: Have you misread anything?, have you truly understood all of the information?, is there anything you intend to dispute?
2. Determine where the fault lies:
a) If the fault is with a late payment or non-payment;
If you have not kept up the repayments, you will not be able to dispute the entry. However, if you have kept up the correct payments then you can contact the companies involved.
b) If you believe there is a case of fraud e.g. if you do not recognize a creditor which is detailed in your report, you will need to inform all the companies involved and it may also be necessary to contact the police.
3. Usually, if there is a dispute with a credit report, the first point of contact would be on-line to the credit report agency. There is the contact information detailed previously as well as a separate process on each website, usually beginning with an on-line form.
4. Contact any company mentioned on the information you wish to dispute. They may ask for reference numbers or other information concerning the disputed entry. They may also request that you prove the debt is not yours, in cases of fraud.
5. If you do not receive a response within ten working days then you should re-send the information. At this stage, it may also be useful to contact the credit report agency again and keep them informed of progress.
6. Once the companies involved have decided where the fault lies and whether to remove the negative information from the credit report, they should contact you to inform you of their decision.
7. If the companies decide that there is a fault and that it is not your fault, they are obliged to remove the information from the report. If, however, the companies determine that the information on the credit report is correct, there will be a temporary dispute notice on the entry but this will be removed unless you submit another query.
8.If the disputed entry is not resolved, repeat these steps thoroughly to ensure that you and the companies have all of the necessary and relevant information.
Managing your existing debts and improving your credit rating:
One way of managing existing debts is by consolidating them. If your credit score is low and you are considered a high risk borrower then this may not be an option. However, it is an option worth considering if you are able to do so. This way would allow you to pay off existing debts and make one regular repayment (usually monthly) making it easier to keep track as you would have one debt instead of several and the single payment is likely to be lower than the total of the current separate debts.
Most creditors will be understanding if you are having problems paying and it will look better for you to make an attempt to resolve difficulties with the creditors rather than not making the payments and ignoring the situation. A telephone call is usually all that is needed to come to an agreement. With a credit card, for example, if you can manage without using it, you may ask the credit card provider to stop any accumulative interest. They may increase the minimum payments but you will have a set amount to repay rather than having difficulty paying an amount which may otherwise be impossible when interest is being added constantly.
Other extras such as late fees can be removed, or at least reduced, by explaining your financial situation to your creditors. You can do this with as many companies as necessary. If you have large payments every month, you can negotiate with your creditors. As long as you make a reasonable offer, companies are usually required to agree although, should you miss a payment which you have negotiated, the company will then have the right to demand the full amount of debt, for which you will be liable.
Another important step is to try and pay off as much as possible on credit cards and other similar debts. Not necessarily paying of the full balance but, for example, setting up a direct debit in order to pay a little more than the minimum amount and/or paying as much extra as is reasonably possible each time.
There are numerous debt consolidation agencies although the best source is likely to be your own bank. This should be your first consideration as your own bank is where you will find the lowest interest rates. However, if you have debts on your bank accounts, they may consider you too high a risk and refuse your application. In this case, there are still several other options although you may find that they do not offer competitive rates of interest.
It is alright to take out new credit whilst mending your existing credit. In fact, it can be good to do so as this will mean that, assuming you are able to keep up the repayments, your new “good” credit will be a good start in counteracting previous “bad” credit. However, whilst a certain amount of credit is good (because it shows ability to pay and having credit makes it easier to get more credit – assuming accounts are properly kept), having an excessive amount of credit can be bad. When checking a credit rating, companies need to be sure that you can afford to repay debts and it is not good to appear to be “living on credit”.
When looking for consolidation credit or any other “bad credit” finance, it is important to look out for irrefutable companies. This is another reason to approach your bank first. They will, usually, be a reputable company whereas, applying, for example, for a loan from an unknown company, there is always a risk that they will attempt to confuse you, take fees, etc. with no intention of actually lending to you. You would also need to look at interest rates. If your credit rating is poor, you are not likely to get a low rate but companies do not usually offer financial products at more than 30% interest. A “bad credit” product from a reputable company would charge interest in the region of 20%. If a provider does not clearly state their interest rates and fees, they are probably not reputable.
Debt management checklist:
1. Add up your debts: You do not want to take out a consolidation loan if the repayments would be higher than your current debts.
2. Decide which direction you will take: Consolidation? Negotiation with creditors?
3. a) If you choose a consolidation loan, you will need to firstly contact your bank to find out whether they will provide the amount you require and compare their interest rate with other companies and work out which company is likely to lend to you before making your application.
b) If you choose to lower your current payments without borrowing more, you will need to contact your creditors to make arrangements.
4. Whichever option you choose, make sure you keep up repayments as agreed. It may, if possible, be worth setting up Direct Debits to pay bills as this ensures they are paid regularly and on time.
New credit checklist
1. Do not take out any more than you can afford to repay.
2. Think carefully about whether you require a secured or unsecured loan. Having a secured loan is likely to allow you to borrow more but it will usually be secured on your home which may be repossessed if you can not keep up the loan repayments. An unsecured loan would be the only option if you do not own your home. It is not secured on anything and, therefore, would mean less borrowing power.
3. It is fine to take out a(nother) credit card but look around for the best rates. Most credit cards now do not charge an annual fee but some (as well as some loans) may require a deposit if you have a low credit score.
4. Keep new borrowing to a minimum. Use a new credit card to pay for every day things, eg. to buy monthly groceries, which you know you will be able to pay back immediately. Paying on credit cards can protect your purchases and paying the full amount each month whilst using the card regularly will be advantageous to your credit rating.