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. You can get your credit scores from all bureaus using FreeScore360.
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,
If you have any of these, the lenders will balk at the idea of loaning you credit. If you’re going to repair your credit, you need to change 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.
Did you know that one in five consumers has a mistake in their credit report? The Federal Trade Commission said one in 20 people with mistakes were able to delete the mistakes and saw a 25-point increase in their scores. There has been an increase in over 100 points for one in 250 people.
Now, the temptation may be strong to dispute every piece of negative information in the report.
However, this could do you more harm than good and is even illegal. If you file disputes just because, they may actually ignore the true mistakes.
How to spot errors in your credit report
There are some very common mistakes in a credit report:
- Duplicate entries
- Fake late payment
- Unrecognized collection items
- Unrecognizable debts
- Incorrect information about limits and/or balances
There are some cases where a creditor will purchase old debt and turn it back into the credit reporting agencies. It’s not legal and can be disputed.
Be sure to really look at the negative items in the report. Consider the ones that are less than two years old, as they will factor heavily into your credit score.
Make sure to print the report and track the mistakes in the margins.
If you notice negative marks on your report that are coming from unrecognized debts, you could be an identity fraud victim. In order to restore your identity, you need to develop an individualized recovery plan by going to IdentityTheft.gov. There are many steps that you must take besides disputing the mistakes.
After you’ve gone over the report, you need to provide evidence that proves the mistake. Attach these pieces of evidence – creditor correspondences, recorded conversations, bank statements and others – to your dispute letter.
Even if you’re unable to provide documentation, you may still be permitted to file the dispute.
Report errors to credit bureaus
After you’ve made note of the mistakes, you need to file a dispute with the three main credit bureaus – TransUnion, Equifax and Experian. This can be done via the online complaint department or in writing. Make sure you have copies of the correspondence.
You can check out the Federal Trade Commission’s website to get a sample dispute letter. Use it to dispute the mistakes in your report. Send it to all three.
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
The bureaus will investigate the items, contact the lender about it and, if no word has been given about the matter in 30 days, the agency deletes the item from the report.
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 their decision, you’re eligible to attach a letter to your report, but this will cost you. While creditors can review the letter, it’s not very 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 credit score is affected by your payment history. This appears to have the biggest effect on a credit score. And, it’s also the easiest way to improve your credit. Just make all your payments on time each month, and you’ll see an increase in your credit score.
If you have no current accounts, consider a secured credit card. You can also use a credit builder loan to establish your credit and show prospective lenders you can pay your debts on time.
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 having a problem with credit card debt, consider a balance transfer card that gives a 0% interest rate for a set period of time. You can also get a personal loan from a credit lending agency such as SoFi, Prosper or the 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 there’s an annual fee with the card, consider asking the bank to give you a card without a fee. Closing an account can hurt your credit score and lowers your credit history length.
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.
Never give a collection agent access to your checking account information. Rather, use a prepaid debit card and transfer the agreed-upon amount to the account.
Before you pay an old collections debt off, make sure the agreement is in writing.
Once you’ve paid off the debts, you can write a goodwill letter to the creditors, asking them to remove the negative marks on the report. This doesn’t always work but doesn’t hurt to ask.
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.