As of April 2016, 31% of Americans had FICO credit scores below 649. That is, credit scores that indicated that they had poor or very bad creditworthiness.
With a poor or very bad score, you can expect lenders to pass you over for loans.
You may struggle to rent an apartment or gain security clearance for certain types of employment.
Even fair credit isn’t good enough for the best possible interest rates.
Need help with this?
Lawyers from Lexington Law can help you remove negative items from your credit history. Call them now 1-800-458-4206 for a free consultation.
Let’s get started with cleaning up your credit report.
These are the steps you can take.
Step 1: Check your credit history
A plan to repair your credit score starts with understanding your credit history.
You can get an official record of your credit history by pulling a free, comprehensive credit report at AnnualCreditReport.com.
AnnualCreditReport.com gives you access to a free credit report from each of the three major credit reporting agencies once per year.
Generally, all three credit bureaus will have the same information in their reports.
Rather than worrying about all three reports, start by pulling data from just one bureau.
At the top of the report you will see a key that will help you understand the report.
Review your credit report to look for patterns that harm your credit.
Harmful behaviors include:
- high debt loads,
- late payments,
- collections items,
- tax liens,
These negative items hurt your credit score and show lenders that you aren’t credit worthy.
For the most part, fixing your credit requires fixing your behavior.
But before you alter your behavior, be sure that you have an accurate picture of your credit history.
Step 2: Dispute errors
When you review your credit history, you may find errors. Errors that include negative information can drag down your credit score. You can dispute erroneous information and raise your score.
One out of every five consumers has an error in their credit report. According to the Federal Trade Commision, 1 in 20 people with errors on their report saw their credit score increase by more than 25 points after removing these errors. 1 in 250 saw their score increase by more than 100 points.
You might be tempted to dispute all the negative information in your report, but this is illegal and will hurt you in the long run. If you file frivolous disputes, the credit bureaus can choose to ignore legitimate errors if they seem like they are a part of an attempt to “jam” your credit report with disputes.
How to spot errors in your credit report
Some common errors to look for include: false late payments, duplicate entries, debts or collection items that you do not recognize, false information about balances or limits.
Sometimes creditors who buy your old debt will re-submit your debt onto your report. This is not legal and can be disputed.
Another common error is old negative items staying on your report too long. Most negative items stay on your credit history for seven years. Chapter 7 Bankruptcy and Unpaid tax liens stay on your report for ten years.
Investigate the negative items on your report. Take a special interest in negative items that are less than two years old. Newer items are factored more heavily into your score than old items.
As you review your report, keep track of any errors you find. You can do this by printing your report and noting errors in the margins.
If you find negative items that are from debts you don’t recognize, you may have been the victim of identity fraud. To recover your identity, create a personalized recovery plan at IdentityTheft.gov. Recovering your identity requires more steps than disputing errors.
Once you’ve reviewed the report, gather any documentation that proves that you found an error. This includes bank statements, correspondence with your creditor and recorded conversations. You will need to attach these to a dispute letter.
If you can’t find documentation, you can still file a dispute. Banks are required to validate the accuracy of any errors you dispute with their own documentation.
Report errors to credit bureaus
Once you’ve gathered evidence of errors, file a dispute with all three major credit bureaus. You can do this in writing or through an online complaint department. Keep copies of your correspondence with the credit bureaus.
The Federal Trade Commission provides a sample letter. Use the outline to dispute errors in your credit report. Send the dispute letter to all three credit bureaus (Equifax, Experian, and Transunion).
The credit bureaus will investigate the disputed items. Your lender will be required to present evidence of an accurate filing. If they cannot do so within 30 days, the credit bureau will remove the item.
You can mail letters to the credit bureaus using the following addresses:
|Equifax||P.O. Box 105069|
Atlanta, GA 30348-5069
|Experian||P.O. Box 9554|
Allen, TX 75013
|TransUnion||Fraud Victim Assistance Department|
P.O. Box 2000
Chester, PA 19022-2000
Follow up with the credit bureaus
Allow the credit bureaus the full thirty days to report back to you regarding the items in question. After 30 days, you can call each of the credit bureaus to determine if they’ve removed the items in question. If they have not removed them, they will inform you.
If you disagree with the resolution of a disputed item, you could pay to file a letter on your credit report. All your creditors would see this letter, but most experts agree that this isn’t effective.
Step 3: Improve your credit score by changing your habits
After disputing errors, repairing your credit requires behavior change. Most people can overwhelm negative information with positive behavior within a few years.
Focus your behavior change on the five variables FICO uses to calculate its credit score.
The five factors include payment history, amounts owed (credit utilization rates), length of credit history, types of credit, and new credit inquiries. You can take specific actions to positively influence each variable.
Make timely payments
35% of your total credit score comes from your payment history. This is the single most influential variable in your credit score. Anyone looking to improve their credit should start by making timely payments. Pay all your current accounts on time every month.
If you don’t have any current accounts, open a secured credit card. You could also take a out a credit builder loan through your credit union or Self Lender. You need to show creditors that you can handle paying your debts.
Pay off debt
30% of your credit score comes from your debt utilization ratio. A debt utilization ratio is the amount you owe divided by the amount of available credit you have. Aim to keep this below 30% at all times.
Most of the time, the best way to decrease your debt utilization ratio is to pay off debt. For a personalized debt payoff plans reach out to a free counselor from the National Foundation for Credit Counseling.
Credit counselors tell clients to harness focus to pay down debts. This means you should put as much money towards one debt while making minimum payments on the rest of your debts.
You can decide if you would prefer to first attack the smallest debt (snowball style) or the highest interest rate debt (avalanche style). Each one is effective for paying down debts and for reducing credit utilization.
If you’re struggling with credit card debt, find a balance transfer credit card that will give you a 0% interest rate to speed up your debt payoff. You can also consider a debt consolidation loan through Sofi, Lightstream, or Lending Club.
Increase available credit
You can also decrease credit utilization by increasing your available credit. Be strategic about increasing your credit. You want to maximize your credit mix and credit availability while minimizing new credit inquiries (which counts for 10% of your score).
If you don’t have a credit card, increase your available credit by applying for a credit card. Initially, applying for new credit cards will hurt your credit. New credit inquiries reduce your score by about 5 points per inquiry. However, the damage is undone in a few months.
If you only have installment loans, a credit card increases your credit mix (worth 10% of your score). Credit cards also increase your available credit without increasing your outstanding debt. This decreases your overall debt utilization.
If you already have a credit card, you can increase your available credit without opening a new one. Simply call your bank and ask for a higher credit limit. If you’ve practiced excellent borrowing behavior, the bank is likely to oblige. Banks won’t put do a hard credit inquiry when adding credit to an existing account.
Don’t open installment loans (such as auto or personal loans) to increase your credit score unless it fits with your goals. Installment loans require you to pay interest and fees. Additionally, they will initially increase your credit utilization.
The increase to the credit mix portion of your score doesn’t offset the decrease in utilization score until you pay down the loan.
Practice self awareness when you open new lines of credit or extend your credit limits. If you will overspend when you have available credit, then don’t open new lines of credit. It’s better to manage your behavior than to tempt yourself with too much credit.
Let time work
Length of credit history comprises 10% of your credit score. Whenever possible, keep your oldest credit card open. If the card has an annual fee, you can ask the bank to switch you to a fee free card. This is better for your score than closing the card.
Even more important than improving your credit length, time allows you to overwhelm negative information with positive credit behavior. Each negative item on your report will come off your report in seven to ten years. And as negative items age, they decrease the impact on your score.
If you’re doing all that you can to improve your credit score, then you need to let time pass. Even people with bankruptcies on their credit report can repair their credit score over time.
Deal with old collections items
Once you’re practicing excellent credit behavior, you may want to deal with old negative information.
Collections agents make you feel like unpaid collections items are destroying your credit score. That isn’t true. Once an item enters collections the damage to your credit is done.
Paying off a collections item stops collections agents from bothering you. It also means your lender can’t sue you, but it won’t heal your credit. Dealing with old collections items should be the last step in repairing your credit.
Collections agents may try to threaten or harass you. Don’t give in to them. You have rights, even related to your past debts. The best thing you can do with collections agents is ignore them until you’re in a position to negotiate with them. Use the scripts from the Federal Trade Commission to get collectors off your backs.
Don’t engage a debt collector until you are in a position to negotiate. A lender cannot remove accurate information from your credit report in exchange for a payment. However, some lenders will skirt the law on this point. You may find that some lenders will remove a negative item from your report if you pay off the debt.
You may also be able to pay less than you owe if you negotiate with collectors and have cash to pay in full.
Do not give collections agents electronic access to your checking account. Instead, open a prepaid debit card (such as Bluebird), and transfer the exact amount of your agreement to that account. Before you pay off an old collections item, get your entire agreement in writing.
After you’ve paid off old debts, you might have some luck removing negative information from your report by writing a goodwill letter to your creditors.
Repairing your credit takes behavior modification. It requires knowledge and applied insights. But don’t think it can’t be fixed. Nothing is impossible. Start taking the steps today, to achieve a great score soon.