The Ultimate Guide to Credit Repair
For many people, the news about their low credit score comes at a very bad time for instance when they are applying for a mortgage, car loan or even applying for a new credit card. The time they get disapproval is the time they realize just how bad things are. When this happens and you decide to investigate the matter, you will be surprised to find a few or many negative items on your credit repot, which are responsible for your low score. While some people will decide to accept the situation as it is and not try their luck repairing their credit, a lot will start their credit repair journey on the spot. This is the only way you will be able to get that which you are unable to access with a low credit score.
Repairing a bad credit will take some time. There are a lot of improvements you have to make on how you spend your money as well as seek the help of a professional in order to see some improvements. This does not mean it will take years though; depending on the number of negative items on your credit report, it can take a few months to six months to see some improvement.
To start your credit repair journey, you need to know what affects your credit first because these are the areas you will pay more attention to during credit repair.
Factors affecting your credit score
Your credit score is calculated from the information on your credit report. It is just a numerical representation of the information on your credit report. In the country today, there are three main credit reporting agencies whose reports are used far and wide; TransUnion, Experian and Equifax. These are the agencies that are contacted by companies that need your credit information in order to know if you are creditworthy or not. A lot of factors are put into consideration in the determination of your credit score and they are summarized under the following categories:
1. Payment history:
This is the category that contributes much to your credit report. Your payment history is basically how you pay your bills each month. 35% of your credit score will be determined by this, therefore it is very important to pay your bills on time without delay or fail. Your payment history is listed on your credit report through the different accounts you have had over the last seven years. Such accounts are for instance loan accounts, credit card accounts, mortgage accounts if you have any among others. The report will show how much you have paid each month compared to the total amount of money you owed each month.
Creditors like utility companies only report late and skipped payments. These will be marked with how late you were in making payments, from 30 to 150 days. Those payments that were made so late will significantly lower your credit score.
2. Total debt
This is equally important as it accounts for 30% of your credit score. The amount of debt you owe especially in terms of revolving debt is very important in determining your creditworthiness. Under this category, creditors will consider your credit utilization. In terms of credit cards, they will weigh the amount of money you owe compared to the maximum line of credit on your cards. If you are the kind of person who maximizes so much on credit use, your credit score will be affected negatively. It is important for creditors to know that you use the credit you receive wisely, and only when it is necessary.
3. The length of your credit history
Loan lenders will not be able to gauge your willingness or ability to repay back a loan if you do not have any credit history showing what you have done with your previous credit. That is why this is an important factor in the calculation of your credit score. It accounts for 15% of your credit score. Under this category, the length of time your credit accounts have been opened will be considered and this includes loans and credit card accounts.
4. New credit
This is usually listed as inquiries on your credit report. It refers to every credit application you have submitted recently, at least in the last two years. New credit accounts for 10% of your credit score. Every new account that you have opened in the last one year can take off about 5 points from your score.
5. Credit mix
The last 10% of your credit score is determined by the types of credit you have. There are mainly two types of credits; revolving credit like credit cards or retail cards and installment loans. Your credit report needs to have a balance of these two types of loans for you to get a higher score. The most important type of credit in the calculation of your credit score is the revolving loan. They hurt your score more than the installment loans because the latter usually have an asset attached to them like a house or a car.
The negative items on your credit report
The kinds of items appearing on your credit report will be the positive ones, neutral and the negative ones. The positive and the neutral items will be reported on your credit report indefinitely but the negative ones have a limited time length when they will appear on your report. Again, the amount of negative damage every negative item causes on your credit score diminishes with time. This means that your bad credit score is not meant to last forever especially if you start working on positive behavior.
The good thing these days is that the negative items can easily be removed from your credit report before their time limit is over. If this is what you want to do, work on the newer negative items since the older ones are fading out slowly and their impact on your credit score may not be that significant.
Here are some of the negative items you can find on your credit report:
i) Charge-offs: these come as a result of a creditor selling your debt to a debt buyer, who will then attempt to collect the amount owed plus the interest, court fees, late charge and anything else that is chargeable on that debt. Charge-offs can stay on your credit report for 7 years and 180 days from the date of delinquency.
ii) Collections: these are debts that have been sent to a debt collecting agency. They are a bit complicated in that you may hurt your credit score further if you pay them off. They are also reported up to 7 years from the date you first fell with the original; creditor.
iii) Repossessions: these are reported for seven years too. The repossession does not take away the debt you previously had, therefore you will still have to pay the debt in full even after it appears on your credit report.
iv) Late payments: late payments are bad even if you will catch up on what you owe. Any payment that is more than 30 days late will appear on your credit report.
v) Bankruptcies: these can appear on your credit report for up to 10 years from the time bankruptcy was filed.
vi) Tax liens: unpaid tax liens will appear on your credit report indefinitely. Those that are paid can stay up to 7 years.
vii) Foreclosures: these are also reported for up to 7 years on our credit report. However, after two years, you can qualify for mortgage if you regain your financial footing.
How to repair your own credit
Even when you have some or most of these negative items on your credit report, there is a lot that you can do on your own to repair your credit score:
1. Get your credit reports from the three main credit reporting agencies I mentioned earlier on.
2. Review each report carefully. Ensure that your basic personal information is accurate and that no other person is listed on your report. Go through every account information and ensure that all of them have been listed accurately.
3. File disputes if there are any errors found on your credit report. You will likely find untimely, inaccurate, incomplete or even questionable information on your credit report. What you do is to dispute that information and have it removed from your credit report. This might help your credit score a lot.
4. Request your creditors to have the negative items removed from your report. If there are accounts that you have already settled but they have been negatively reported, you can request your creditor to have such removed. You can request an item removal too if you promise to pay the amount owed in full. If you succeed in this, your credit score will be much better than it was in the beginning.
5. Work on your credit utilization ratio: once your report is free of all the errors and most of the negative items, you can continue working on strengthening your credit score more. By lowering your credit utilization ratio, you might end up improving your score significantly within a short period of time. This can be achieved by paying off your credit card balances especially on those cards that have huge balances and working to maintain lower balances on all your cards.
6. Access your accounts in collections: if you have any accounts that have been sent to collections, you need to work on them immediately especially the most recent ones. Deal with those that affect your credit scores significantly first and make full payments on them. If you are not in a position to make full payments, negotiate for a settlement with the debt collector so as to pay less than what you owe.
7. Apply for a credit-builder loan: these types of loans are issued by credit unions and smaller banks as a way to help people build their own credit scores. What the loan lender does is to deposit the loan amount on an account that is not accessible to you, which you access once you finish paying off the loan. You are then required to make monthly payments on the loan amount until it is paid in full.
Maintaining a healthy credit over time
After repairing your low credit score, you need to start working on maintaining a healthy credit as this is the only way you will get to enjoy the benefits of a good credit score for a long time. There is a lot more that you can do after you have taken care of all the negative items that were affecting your current creditworthiness:
1. Pay your bills on time: since the biggest part of your score is determined by how timely you are in paying your bills, it is important to ensure that all your bills are paid on time. Note that a single late payment will cause a significant drop on your credit score, and this is not what you want after working so hard to repair it. Organize your due dates or automate all your bill payments to make it easy for you to make all your payments on time.
2. Stick to a budget: a budget will help you live within your means, and then you will not have to spend so much more than you need to. If you are able to keep your finances on track, you will not need to use so much credit and this is good for your credit rating. Save up some money so as to be ready for any emergencies that may come up. When that happens, you will not have to use credit to cater for such emergencies, which leaves you with so much money as credit balances. Do no spend so much money on your credit cards too, because every time you pay on credit, you are left with a lot more to pay.
3. Use a secured credit card: a secured credit card can help you in repairing your bad credit score. If you apply for this card and use it responsibly, your credit score will not be affected.