Credit Repair

Pursue credit repair

Credit RepairMany consumers in the United States are ignorant of how credit bureaus calculate credit scores. You need to know if you want to succeed in credit repair. The good thing is that you are reading this article and will soon find out what goes into your score sheet. You should not mistake items on your credit report with a credit score. The former tracks and tells the story of the way you handle payments. The latter is like the GPA you used to get while in college. A credit score is like a gauge that measures how successful you are at handling credit, relative to other borrowers.
While calculating the score, credit bureaus derive information from three aspects:

  1. Your payment history
  2. How much you owe
  3. Duration of credit

Payment history

How fast do you pay your bills? Are there occasions when you have been late? Answers to these questions have a significant bearing on your payment history. Your credit score gets a positive or a negative impact when you settle your dues on time. Some of the instruments of credit that you should promptly pay up include:

  • Mortgage
  • Student loan
  • Auto loan
  • Credit card
  • A home equity line of credit

While calculating your score, credit agencies do not consider payment of rent for your house. Also, they do not consider utilities such as water and electricity bills. However, if you fail to pay, your landlord or utility provider can initiate collection activity. If such happens, your FICO score suffers.

Payment history takes up 35 percent of the score. Besides, there are collection items that could bog you down. Examples include:

  • Bankruptcy
  • Foreclosure
  • Lawsuit
  • Charge-off
  • Lien

Despite maintaining an up to date payment status, you need to look at other aspects that go into your credit file. Being late on a few payments may not always hurt your overall score.

How much you owe

Debt is a part of life, and no matter how careful you are, you must borrow money at some point. There are things you cannot achieve with your savings alone. However, debt also impacts your ability to spend. Say for instance that your earning from employment, net of taxes and other deductions is $300. Despite having $300 to spend, you still must pay $100 on your car loan and a further $50 for a student loan. In the end, you only remain with $150 for upkeep. Compare that scenario with someone who earns the same but has no loans to pay. You need no financial knowledge to know who has more spending power.

Determinants of your score

Debts account for 30% of the FICO score. Credit bureaus compare the balances on your credit card with the credit limit set by the lender. If the amounts remaining are higher than the threshold, your credit score suffers. For other types of loans, the score depends on the difference between the initial borrowing and the outstanding balance. To maintain good standing, ensure that you offset your balances as soon as you can. Doing so lowers your utilization of credit. Too much debt affects your score. Similarly, seeking an exit route such as filing for bankruptcy has a damaging effect; it results in the deposition of negative information.

Duration of credit

From the time you started using credit to date, the system keeps this data and computes the age of your debts. Generally, scoring models assign this element 15 percent of the overall score. With this background, you may now proceed to examine how your age of credit history influences the result. When you approach a lender, they review how you have handled your debt obligations in the past. Doing so helps lenders ascertain your ability to repay. Lenders trust borrowers with a long credit history since it reflects experience.

Maintaining reputation through prompt payment

For example, having a reputation for paying your debts on time shows that you can manage credit responsibly. Lenders consider you worth their risk and will approve your loan requests. For an agency to generate a score, you should have had an account for the last six months. Unfortunately, if you have not had credit for this long, there is little that you can do about your situation. You could try charging a few expenses on your cards on several occasions but remember to pay promptly. Also, if a bank rejects your application for a regular credit card, obtain the secured card instead. The beauty with having the latter is that you will have money to back your spending.

  • a. Learn the skill
    Every attempt made to improve your credit is like bringing up a child – it takes time. You can still adopt responsible financial behavior. Always ensure that you do not pay bills past the agreed date. Also, avoid making partial payments. Observe those due dates by establishing an alert system. You can mark the days in your calendar or set up phone notifications.
  • b. Pay attention to the assigned limits
    For credit cards, avoid running up significant balances. Even though you plan to offset such balances, lenders will see that your credit utilization ratio is still high. To avoid getting caught in the vicious credit card spending cycle, refer to your statement and check the maximum limit. After that, restrict your usage to between 10 and 30 percent of that amount.

The last word

If you are reeling under the weight of negative items on your credit report, life could seem stressful. Despite the adverse nature of the information in your statement, no credit repair company can remove what a credit bureau posted with accuracy. Fortunately, the law provides you an opportunity to question the validity.
Where a lender rejects your application for employment, insurance or credit, you can apply for a free credit report summary. Also, when hiring credit repair professional, the Credit Repair Organizations Act requires that he or she provides you with the following:

  • A copy of the law stipulating your rights as a consumer
  • A contract

Alternatively, you may seek the services of a credit consultation firm for advice on budgeting, managing money, and debt.

Author: Jay Batson

My Name is Jay has and I have a passion for financial writing. I am the chief writer on this blog. I do my best to verify all the information but if there is anything amiss please let me know and I will do my best to correct it.