#1: Know What Your Credit Scores Are
Sometimes credit counselors can help individuals get a head start on credit repair. More often than not, individuals can help themselves for free.
A three-digit credit score provided by the credit bureaus can tell lenders all they need to know about you. At a glance, they can tell whether you pay your bills on-time, whether you are able to control your finances and if you can be trusted with their money. If your score is 720 or higher, they’ll feel comfortable extending a helping hand so you can purchase that new house, car, boat or college education. In fact, they have so much confidence in you they’ll even offer you a very low interest rate, which acts like a coupon that can end up saving you hundreds or even thousands of dollars.
However, if your score is in the 600s, they most likely won’t offer you such a sweet deal because they know that there’s a slight possibility you’ll mess things up. They see you as a generally good borrower who occasionally stumbles upon hard times. You’ll still have access to credit when you need it and you’ll get okay rates, but you’ll have to kick it up a notch to be seen as completely creditworthy.
Video: CNN – Improving Your Credit Score
If you’re down to 500 or less, which is considered “bad credit,” doors will slam in your face. Credit card offers will mysteriously stop arriving in the mail. You may be flat-out denied a bank account, a student loan or a mortgage. Your options may be severely limited to loan sharks and extremely high-interest deals. You may even begin to feel poorly about yourself, knowing that you appear reckless and no one trusts you with money.
#2: Know Your Credit Score
If you were to receive a report card for your credit score, you’d get an outstanding “AA” for a 720-850, a very good “A” for a 700-719, a good “B” for a 675-699, an acceptable “C” for a 620 – 674, a poor “D” for a 560 – 619, a very poor “E” for a 500 – 560 and a flunking “F” for anything below 500.
Even if you’re down in the dumps with a sub-500 credit score, there are things you can do to begin improving your lot. Since the most recent 12-24 months factor most heavily into your credit score, you’ll notice results within a year if you set to work repairing your credit straight away. Under the Fair and Accurate Credit Transactions Act of 2003, you are legally entitled to one free annual credit report from each of the three credit bureaus: Equifax, Experian and TransUnion. By law, you are also able to purchase a copy of your credit score, along with an explanation on what factors comprised your particular three-digit number.
The first step is to obtain a free copy of your credit report and pay the $6-$10 to see your credit score, so you know what you’re dealing with.
#3: Dispute Credit Report Inaccuracies
Once you have your credit report on-hand, you can then dispute any credit inaccuracies that you find. An estimated 1 out of every 4 credit reports contain serious errors. When you receive your report, look for: incorrect names, incorrect addresses, dated employment information, accounts listed more than once and any information that has been reported delinquent. Circle with a red pen or highlight any of these inaccuracies on a photo-copy of your report and include a letter stating what you have discovered and why it should be changed. Once your letter is received, the credit bureau will then investigate the inaccuracies and respond to you within 30 – 90 days. If the information proves true, you lose nothing. If the information proves false, it will be dropped from your report and you could see your score boosted by as much as 100 points overnight! This is essentially what credit repair agencies offer to do for you, but it can easily be done yourself.
#4: Consolidate Your Debt
If you’re way in over your head and you feel like you’re drowning in a sea of paperwork and collections calls, you may want to consider consolidating your debt – either with a lower interest rate credit card or through a debt consolidation company. Sometimes you can transfer your other credit card balances for free onto one 0% interest credit card. You can try the Discover More card or the Citi Platinum Select, which offer no interest charges for a year, to get started consolidating your debts and making just one easy payment each month. It’s important that you keep your other credit card accounts open so you don’t diminish your “total available credit,” which is one factor of your credit score. If you can’t get a credit limit high enough or are having trouble with harassing debt collectors, you may want to go with a debt consolidation company. They’ll negotiate with your creditors to get you a reduced monthly payment plan and each month you’ll pay the consolidation company and they’ll pay off your creditors.
Video: MSNBC – Repairing Your Credit
#5: Pay Your Bills On-Time
The importance of paying your bills on time every month cannot be overstated. Consider that the breakdown of your credit score is calculated as follows: 35% Payment History (This means paying all of your bills on-time every month); 30% Amounts Owed (This means keeping your debt-to-credit-limit ratio down to 30% of what’s been offered); 15% Length of Credit History (This means keeping old accounts open); 10% Credit Inquiries (This means not scrambling for every credit offer you can find all at once); and 10% Credit Types (This means having a diverse mix of monthly loans and credit cards that you manage well). As you see, the most important factor is paying your bills. To improve in this area, you can request a new billing due date from your creditors that better coincides with your pay schedule or you can set up auto-payment through your bank if you’re forgetful. If you simply don’t have enough money, consider working over-time, taking a second job or looking into additional ways to save.
#6: Know How to Manage Your Money
Sometimes consumers don’t know where to begin hacking away at their mountain of debt. One easy way to begin improving your credit is to pay down your credit card balances, particularly maxed out accounts, until you reach 30% of your limit. So if you have a $5,000 limit on your card, be sure it’s paid down to $1,500 or less. Another good strategy is to list your cards in order of the highest interest rate and start throwing extra money toward paying off the highest interest cards first, while continuing to make minimum monthly payments on all the rest. If your debts are insurmountable, you may work with a collections agency to make a debt settlement, which will consider your debt forgiven at a reduced cost. Take an objective look at your financial situation and be honest with yourself. Are you paying more than 36% of your income on rent/mortgage payments and utility bills? Are you paying more than 15% of your income on food? Do you spend more than 4% of your money on clothing, more than 17% on your vehicle / transportation expenses or more than 7% on your medical care? Do you spend more than 10% of your income on recreation? These are all general guidelines to help you decide where you may need to cut back. Visiting with a nonprofit credit counselor can help you budget your finances more wisely.
#7: Be Patient
It’s true that patience is a virtue – a virtue that, unfortunately, not all of us have. The good news is that you can repair your credit. The bad news is that it rarely happens overnight. For really poor credit offenders, it could take 3-4 years before those favorable interest rates are offered. For people with good credit looking to reach great credit status, it could take a year or two. However, by taking conscientious steps each month to pay your bills on-time, reduce your debt load, diversify your portfolio and only accept the credit that you need, you can expedite the credit repair process.
Credit Repair Companies to Help You Get On Track
Lexington Law
Sky Blue Credit Repair Services
DSI Solutions
My Credit Group
Apex Credit Services LLC