Credit Repair | A Complete Guide to Fixing Your Credit
We normally associate credit repair with people who have bad credit. Closer to the truth, however, is that nearly everyone needs to engage in credit repair at some time in their lives, and occasionally more than once.
Sure, it’s usually most necessary for those with low credit scores. But even if you have an average or good score, you may want to increase it even more, either to improve your chances of being approved for certain loan, or getting lower costs and better terms.
There may be some element of vanity in wanting to have the best credit score possible.
But in financial terms, your credit score really does impact your bottom line. For example, a credit score of 750 might get you the lowest rate on a home mortgage, while a score of 600 may result in a decline.
No matter what your current credit situation is, sometimes you need to do more than just make your payments on time. You may need to work on getting some negative information removed, or rearranging your debts to get your credit score higher.
Each represents a form of credit repair, and that’s exactly what we’re going to discuss in this article.
Table of Contents:
- What is Credit Repair
- Credit Repair Companies
- Credit Repair Software
- DIY Credit Repair
- Credit Repair Takes Time
- Credit Repair Infographic
What is Credit Repair?
Credit repair starts out with two basic objectives:
- Eliminate or minimize negative entries and information on your credit report, and
- Increase positive entries.
Eliminating or Minimizing Negative Credit Entries
The process starts with getting a copy of your most recent credit report, and examining each line item. If any are showing negative information, those are the ones you want to zero in on.
In looking at the negatives, the first goal is to scan for any that may be in error. These can include collections that are not yours, accounts with negative payment histories that belong to someone else such as an ex-spouse, or open balances you’ve long since paid.
By getting this information corrected, or removed from your report, your credit score will get an instant boost.
One of the biggest potential negatives, and one that’s vague to most consumers, is excessive credit utilization. This is determined by what’s known as your credit utilization ratio. That’s the amount you owe on your credit lines, divided by your total credit limits.
For example, let’s say you have five credit cards with a combined credit limit of $20,000. If you owe a total of $15,000 across the five cards, your credit utilization ratio is 75% ($15,000 divided by $20,000).
A credit utilization ratio of 75% is considered excessive, and will weigh down your credit score. Credit utilization is the second biggest credit score determining factor, behind only payment history. It accounts for 30% of your score, so keeping this number at a reasonable level is mission-critical.
A credit utilization ratio of 80% or more is considered indicative of potential default, since you’re approaching maxing-out your credit cards. The lower the rate is, the better. But a ratio below 30% is considered ideal. If you have a good credit score, and you’re looking to improve it, getting the ratio below 30% may be the most important strategy.
Increasing Positive Credit Entries
Increasing positive credit entries can be equally important. Oftentimes, a credit score is weighed down by a lack of good credit. It can even be held down by an absence of sufficient credit.
If you already have good credit, you’ll naturally want to continue making your payments on time.
But one of the best ways to increase your score is by paying off a loan or a credit card. We’ve already discussed the importance of credit utilization, and that certainly needs to be considered if you want to improve your score.
But paying off a credit card completely, or an installment loan, is a way to boost your score a few points immediately.
The credit bureaus like paid loans, because they confirm successfully completed credit obligations. The more of them you have, the better. This isn’t to say that you need to pay off all your loans. But your credit report should reflect a healthy mix of both open and paid loans.
If you have poor credit, you certainly need to work on removing as many negative items as possible. But it’s equally important to add good credit to the mix.
You can do that by taking small loans, making the payments on time, and paying them off early.
What to Do if You Can’t Get Approved for New Credit
If you’re unable to get approved for traditional loans or credit cards, look into secured credit cards or credit builder loans.
Secured credit cards usually require that you put up an amount of money equal to the credit line as collateral. Because the line is completely secured, the bank is highly likely to approve the credit line.
You can then use the credit card, and your payment history will be reported to all three credit bureaus. This will give you a positive credit history that will improve your score.
Credit builder loans can accomplish the same goal, except you can open one without any money at all. Many banks and credit unions offer credit builder loans.
You apply for a loan, and when the bank approves it, the funds are immediately deposited into a savings account to act as collateral for the loan.
Your monthly payments on the loan are paid out of the savings account. Since it happens by automatic draft, the payments are guaranteed to be on time.
It will happen completely out of sight for you, and will likely cost you less than $100 for the interest on the loan. Meanwhile, the bank will report your perfect payment history to the credit bureaus, as well as the paid loan status when the term ends.
Either method will enable you to add good credit that can work wonders to increase your credit score.
Credit Repair Companies
Whether or not you should engage the services of a credit repair company really depends on the state of your credit.
If your credit score is being weighed down by one or two items, it will be more cost-effective to deal with those yourself.
And if you have an average or good credit score, and you’re just looking to improve it, you should simply follow the steps laid out under “How to Repair Your Credit”.
But if you have fair or poor credit, caused by multiple negative credit entries, using a credit repair company should be a consideration. Each one of the negative entries may need to be challenged, and that can be both complicated and time-consuming.
If you’ve never successfully disputed a credit item before, or you don’t feel comfortable negotiating, using a credit repair company may be your best strategy.
A good credit repair company is staffed by experienced, competent professionals, who know their way around the credit universe. They’re well acquainted with disputing negative information and negotiating with creditors – even the uncooperative ones.
In addition, it’s often better to have a third-party represent you in a potentially confrontational situation than to do it yourself.
You’ll pay a fee for their services, but it may be well worth paying if your credit report shows a lot of negative entries.
If you have one or more particularly difficult credit situations on your report, you should lean toward a credit repair company that’s also a law firm (which many are). Often, just getting an attorney involved in your situation is enough to make it ornery creditor cooperate.
Finding the Right Credit Repair Company
You’ll need to be careful in selecting a reputable credit repair company. The industry has grown large in recent years, and it’s filled with companies that have little or no real experience.
They can end up costing you money, without delivering any satisfactory results.
Here at Better Credit Blog we have a list of ten credit repair companies you can check out to begin the search for one that will work for you.
Credit Repair Software
Credit repair software is an area of credit repair that we generally discourage readers from using.
It’s another part of the credit repair industry that’s been growing steadily in recent years, but is of questionable value at best.
You’ll be charged a fee, that can range anywhere from $50 to as much is $400. In exchange, you’ll be given software to track your negative credit information, as well as sample credit dispute letters.
There are three problems with credit repair software you need to be aware of:
- As discussed above, you’ll pay a fee for the product.
- They only provide forms, which means you’ll be doing all the work.
- In most cases, there’s nothing they provide that you can’t get elsewhere on the web for free.
Yes, a lot of products and services are now available on the web. But that doesn’t mean they’re all worth paying for. Credit repair software falls into this category. Simply having forms won’t fix your credit problems, nor will it save you the time needed to get the job done.
Do-It-Yourself (DIY) Credit Repair
DIY credit repair is always an option, as long as you feel up to the task. You should have at least some experience successfully disputing credit information in the past, as well as be comfortable handling potentially tense negotiations. If you do, it’s certainly worth trying.
We’re not going to go too much detail here, because DIY credit repair is an involved process. But here are the basics:
Know your rights under the law
The Fair Debt Collection Practices Act is a federal law that limits what creditors can do to collect debts, and is administered by the Federal Trade Commission.
For example, it limits when a creditor can call you, and prohibits them from making threats. Just knowing your rights under this law can go a long way toward taming a hostile creditor.
Get a copy of your latest credit report
It’s best to have one from each of the three bureaus, TransUnion, Equifax and Experian. Information can appear on one that isn’t on the others. Review each report, and highlight any negative entries.
Look for errors
Many credit reports contain errors, usually of the negative variety. If you find any, you’ll need to contact the three credit bureaus and open a dispute. The credit bureaus will investigate the entry, and if it’s not yours, they’re required to remove it by law.
Sometimes you may need to dispute an item directly with the creditor. If you do, you’ll need to write a cover letter that summarizes the dispute, and attach any supporting documentation. But be warned that if you don’t have any documentation to support your claim, the creditor may not remove the item.
Contrary to what you may have heard or read, it’s generally not possible to get negative credit information removed without hard evidence.
Time Heals All Credit Wounds – Eventually
This pertains to the negative credit information that you can’t remove. That will include public records and derogatory credit information where you are actually at fault. But even if that’s the case, all isn’t lost.
The one advantage you have working in your favor with credit problems this time. The more time that passes between the negative credit event and today, the less impact it will have on your credit score.
For example, a late payment from five years ago has less impact than one from six months ago. And eventually, all the negative information will fall off your credit report in its own time. This is generally between seven years and 10 years, depending on the derogatory information.
Do what you can to remove as much negative information from your credit report as possible. If there is a past due balance or a collection account that you do owe, pay it immediately. Even though the negative item will remain on your credit report for several years, a paid account is always better than a past due or a collection.
And as described earlier, pay all your obligations on time from now on, and systematically work to add new, positive credit to your report. As your positive credit builds, and time passes, the negative stuff will eventually go away.
A Guide to Repairing Your Credit
We’ve summed up our best credit repair strategies into an infographic. Here’s our bad credit survival guide:
In this article, we’ve presented a high-altitude view of the credit repair process.
It can be fairly simple if you only have a little bit of bad credit, or you’re just looking to improve your score. But it can be amazingly complicated if you have a long history of bad credit.
That’s when you need to call in the professionals, like credit repair companies and avoid making any more mistakes to hurt your credit any further.
But check back with us on a regular basis. We’ll be expanding on each of these topics going forward.
If you have thoughts of going the DIY route to credit repair, you won’t want to miss any of them.
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