How to fix bad credit – repair credit score
You've probably seen ads telling you, "we can erase your bad credit – 100% guaranteed. "Or perhaps those who promise they can:" create a new credit identity – legally. "Any company that promises a quick fix like this for your credit score is a scam. "Attorneys for the federal trade commission, the nation's consumer protection agency, say they have never seen a legitimate credit repair organization make these claims," the FTC's website states.
Fix your credit when your score has fallen "takes time and there is no quick way to fix a credit score … The best advice for rebuilding credit is to manage it responsibly over time. "This is the advice you find on the FICO website. Believe it.
FICO stands for fair isaac corporation. This american company introduced the first FICO score for general purposes in 1989. Since then, consumers have depended on maintaining a good FICO score to obtain loans and credit cards – especially if they want low interest rates and generous terms.
Now that it's clear there's no quick fix to improve anyone's credit score, let's review the steps to repair your score the slow and legal way.
Step 1 – understand how your credit score is determined
You need to understand the five components that affect your credit score before you can start making repairs. Here's what FICO looks like:
- Payment history – 35% of your score – paying all your bills on time is the fastest way to improve your score.
- Amount owed – 30% of your score – if you reduce the amount you owe, your credit score will also be improved.
- Length of credit history – 15% of your score – the longer you have open credit, the better. Never close your oldest credit card.
- New credit – 10% of your score – every time you sign up for a new credit card or loan, your credit score will likely drop for at least a short time.
- Types of credit used – 10% of your score – A good mix of credit types (credit cards, installment loans and long-term loans, like mortgages) will build a credit score
Step 2 – pay your bills on time
Since 35% of your credit score is based on your bill-paying history, paying bills on time every month is the most important thing you can do to repair your credit score. Two good strategies to improve your payment history:
- Set up automatic payments using your bank's online bill payment system or your payee's automatic payment system. The danger of this strategy is not having enough money in your bank account to cover the automatic payment. So make sure you always have a cushion in your account to cover these automatic payments.
- If you prefer more control, set up a place in your home where you always pay bills.Make sure all bills arrive where they do in the mail (or print an email invoice when you receive your bills). Get an accordion file that you use to put the bills in the file based on the day you need to pay them. Be sure to pay your bills so that your check or electronic payment reaches your creditors on time.
If you're unable to pay all your bills on time, "buffer the blow to your credit score by using only one account. There is a component to the FICO score called "prevalence, " says john ulzheimer, credit expert and president of the ulzheimer group." This means that five collections are worse than one. " He recommends that the highest monthly payment falls back to free up more money each month to pay your other debt obligations. "
"If you have to choose between debts, skip the credit card bill because it's unsecured and a creditor can't take anything back. Fortunately, credit card delinquencies hurt credit scores less than larger debts, like home or auto loans, " says sarah davies, senior vice president of analytics, product management and research for vantagescore solutions.
Step 3 – get your credit reports
Now that you're paying your creditors on time, the next step is to get a copy of your credit reports.You can get them for free once a year in the annual credit report. You must request a free report. From any of the cred it reporting agencies – equifax, experian and trans union. Don't sign up for a credit monitoring service, just get your free copy of each report. When you get to the website, click on the red button with the message "request your free credit reports. "You can only apply for one company at a time, so you have to go back to this website three times. The most effective way to do this is to ask for a report every four months – then you'll have the year covered.
Step 4 – correct any errors
Read each report carefully. If you find errors, correct them with each credit reporting agency individually. Generally, you are considered guilty until proven innocent. When writing to the credit bureau, be sure to send copies (not the originals) of any supporting documents you may have that there is an error on your credit report.
For more information on correcting your credit information, see "credit repair: how to help yourself" on FTC's website and troubleshoot credit reports . Agencies must investigate all issues within 30 days.
Step 5 – reduce credit card use
After late bill payments, the next biggest impact on your credit score is how you use your credit cards, which accounts for 30% of your score. Ideal usage is considered between 10% and 20% of your available credit limits. For example, if you have $10, 000 in available lines of credit, then the ideal balances would be between 10% ($1, 000) and 20% ($2, 000). People with balances in this range tend to be offered the best interest rates.
You need to show that you are good with credit, so putting occasional balances on your credit cards can be a good thing to do. Someone who never uses credit probably won't have as good a credit score as someone who shows he or she can use it well.
Step 6 – monitor your progress
You can see how well your credit repair is working by monitoring your credit score. There are numerous ways you can do this for free, in addition to your free reports. Many credit cards offer you a free monthly credit score as part of their services. If you haven't signed up for a free score yet, check with your credit card companies or banks to see if any of them have a free service.
Join a free credit monitoring website. Make sure there are no hidden monthly fees. Some merchandise include credit karma and credit. Com. Credit karma even offers a free credit score simulator that allows you to determine the likely impact of a credit decision before taking on that new loan.