Credit Repair Guide
If you’re here, it’s because you have bad credit you want to repair or you want to improve your credit score. In a weakened economy, with many lenders tightening their requirements, more and more people want to know how to read a credit report, what their credit score means, and how to repair bad credit.
Why is a good credit score important?
Good credit scores are essential for any kind of loan you may wish to obtain, whether a home loan, auto loan or credit card. However, lenders aren’t the only companies that check your credit score. If you are a renter, any potential landlords will also usually check your credit report to make sure they can rely on you to pay your rent on time. Also, many employers check credit scores, as they are an indicator of your fiscal responsibility and reliability. Therefore, it’s important to work on maintaining a good credit record or improving your record if it has been damaged. In any economic climate, a good credit score is essential.
Not only will you be offered more credit if you have and maintain a good credit score, but you will find better terms offered to you by lenders. While you may be able to obtain a loan if you have bad or damaged credit, you will likely find yourself paying higher fees and interest, which will cost you more in the long run.
When to consider credit repair
If you are planning on getting a new car or buying a home, the time to consider credit repair is well in advance. Credit scores don’t improve in a short amount of time. Of course, the best strategy is to always have your credit score in mind and make sure your use of credit is responsible and payments are on time. If it’s too late for that, it’s never too late to start working towards improving your credit score - just keep in mind that it won’t happen overnight, or in a couple of months.
Fortunately you can take advantage of credit repair if you have some inaccurate, misleading or erroneous credit showing on your report. You will need to file a dispute about the inaccurate credit to the credit bureaus; they will have a certain amount of time to either verify the accuracy of the information or remove it from your report.
The first thing you need to do when you start credit repair whether you are doing it on your own or if you are using a professional, is to get a new credit report from each of the three major credit bureaus, TransUnion, Experian and Equifax. You can get a free report every year from Annual Credit Report - this will include a report from all three major credit bureaus.
Check out additional articles on credit repair.
Steps to credit repair
The first thing to do is review your credit report for errors and get any errors removed. The reporting agencies have been known to make errors! You may have to file disputes or contact any company that has file information on your report in error. Getting errors off the report is the first step, and it’s a pretty easy one for you to do yourself. Look for duplicate accounts, outdated items, wrong names and inaccurate balances.
If you have any past due accounts, work at bringing them up to date. If you are having problems making the payments, contact your creditors and inquire about setting up a payment plan. Your credit repair efforts will not be effective if you are still showing late payments. It is also important to pay off any of the debts that you can so that they can be eliminated completely.
Do not close out your credit card accounts. If you have numerous credit cards, just put them away and stop using them - do not close them. Unfortunately, closing your credit card accounts actually works against you be decreasing the amount of available credit. Department store credit cards are not considered as valuable as other types of credit, so it will not hurt to close those and it will help you resist the temptation to spend money you don’t have.
Currently, many of the major credit card companies are reducing credit limits or closing accounts with no balance. Consider keeping a small balance on cards you want left open - don’t pay them off completely. Having a balance will not hurt you, as long as you pay at least the minimum due on time every month.
Do not apply for any more credit while you are attempting credit repair. Every inquiry counts against you and you will have more success with your credit repair if you avoid getting more credit until you have completed your credit repair. After your report is cleaned up and your score is higher, you will be able to get better terms, so it’s better to wait to apply after you’ve done your credit repair work.
Debt Consolidation and Management
Should you consolidate your debt? If you have multiple loans and credit cards and you’re finding it difficult to make timely payments on all of them, you should consider consolidating your debt to one account. The advantage is that instead of multiple payments, you only have one. If you have a low credit score, it may be difficult to obtain a debt consolidation loan with really good terms, but credit card terms are not typically very good, either. Regardless, the goal is reducing the number of open balances so you can work on improving your credit score, so find the best possible deal you can qualify for and take it. Once your credit score is improved, you can work on getting better terms. Alternatively, if you have a card that has a lower balance and interest rate, consider moving your balances to that account, especially if there are incentives offered for doing so.
If you can get a line of credit on your home, that is the best option, as the interest is deductible on your taxes and you can typically get better terms. Just make certain, whatever option you take, that you make the payments on time. If you have consolidated your debt to a line of credit, your bank can foreclose on your home. Keep in mind that the goal is always to improve your credit score and consolidating your debt is working towards that goal.
Credit Counseling
Sometimes, people just need to admit they’re in over their head - and seek out help. If you’re drowning in a sea of debt and have collection agencies calling you, a credit counselor can be just the lifeline you need.
A credit counselor cannot make your debt disappear or improve your credit score quickly. Avoid any service that makes these types of claims. With consumer credit counseling, you work with a counselor to decide how much you can afford to pay on your credit card bills each month. Your counselor then works with your creditors to work out a debt management plan that fits with your ability to pay. This new payment schedule often includes a lower interest rate, thus lowering your minimum monthly payment.
Being under a debt management plan makes your credit card payments easier to manage. In most cases, your payments will be sent to your credit counselor rather than to each of your creditors. Your credit counselor is responsible for distributing your payments to your creditors each month. Even when you’re on a debt management plan, it is wise to monitor your credit card accounts to be sure that your payments are being applied.
One thing to watch out for with credit counseling is the way your credit accounts are reported on your credit report. Even though you’re making your payments on time each month, you aren’t necessarily paying as you originally agreed. Doing this can negatively impact your credit score. Not only that, some creditors include remarks on your credit report that indicate you are under a debt management program.
The effects of credit counseling, though not as severe, are comparable to that of bankruptcy. You may find it difficult to obtain new credit as long as you are on a debt management plan or even for a few years after while you solidify your repayment history.
Be advised that as long as you are on a debt management program you will not be able to use your credit cards. You might also find it difficult, or even impossible, to obtain new credit during that time. The inability to use credit isn’t such a bad thing, though. It’s easier to pull yourself out of debt when you aren’t constantly renewing the debt. Use the break from credit cards to learn better money management so that once you start using credit again you’ll have the habits that keep you out of debt.
Even though credit counseling has some disadvantages, that doesn’t disqualify it as an option for relieving pressure from debt. If you are having trouble managing your credit card payments and you are in danger of falling behind on your payments, or even already behind, then credit counseling can keep your credit score from being too severely damaged.
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Expectations and Realities
Credit repair is not a magic cure for your credit woes; you will need to do some work. It is important at the outset of a credit repair effort to have a realistic perspective- don’t lower your expectations; just make the effort needed to meet your goal of better credit and fiscal responsbility.
- Get control of your existing obligations by building a realistic and practical budget.
- Learn how to manage your account balances properly to fully optimize your credit scores.
- Learn the effect each type of credit can have on your credit scores.
The more you know about your finances, the better off you will be. When the time comes to make a decision that will affect your monthly cash flow, it should be made in the context of good information. Read the articles at this site and our other finance sites, Credit Rehabilitation and Credit Check Facts, and learn how to budget, manage expenses, avoid credit pitfalls and take the steps necessary to make sure your finances and credit score remain healthy.
