-
How to Repair Your Own Credit Score
By Brandon Cornett
© 2011 All rights reservedDo not pay anyone to help you repair your credit. Most of these companies are scammers that charge upfront fees and fail to deliver results. It's one of the most "scumbag-rich" industries in the United States. You can repair your own credit score with a combination of knowledge and discipline. The discipline part is up to you. The knowledge is presented below.
Bad Credit Kills Your Chances of Getting a Mortgage
There are plenty of reasons to improve your credit score. But this is a home-buying website, so I'll focus on that. If you want to get a mortgage loan to buy a home in 2011 or beyond, you will need good credit. The definition of "good" varies from one lender to the next. Let's just say anything below 620 on the FICO scoring scale is considered a bad score.
If you fall below this range, you will have a hard time qualifying for a mortgage loan. And even if you do qualify, the lender will charge you a higher interest rate than a borrower with good credit.
So now you have several reasons to repair your own credit score:
- By handling it yourself, you'll avoid the upfront fees charged by "credit repair" companies.
- You'll greatly improve your chances of getting approved for a mortgage loan.
- You'll be offered a better interest rate on a loan, which lowers your monthly payment.
- You'll have an easier time qualify for other financing, such as car loans.
That covers the "why" factor. Now let's talk about the "how" side of things...
How to Repair Your FICO Score
If you ask ten different financial advisors how to repair your own credit score, you'll probably get ten different replies. People have their own opinions on where you should start, in what order you should proceed, etc. But don't be confused. Opinions may vary, but facts are facts. I've been researching and writing about this topic for years, and I can tell you the steps below will give you the best results. This is a proven strategy that was worked for countless people.
1. Fix Errors in Your Credit Reports
If you want to repair your own credit score, you have to start with your credit reports. Why? Because the information contained in these files is what drives your score. Negative information will produce a bad score, while positives trends will improve it. This is where it all starts.
You actually have three different credit reports maintained by three different companies. Not many consumers realize this. So you should start by ordering copies of all three reports and checking them for errors. The image below shows how all of these things are connected.
You can order your reports directly from the companies who produce them, if you want. Experian, TransUnion and Equifax actually have a jointly owned website where you can do this. It's called AnnualCreditReport.com. This is the only credit-report website that's regulated by the federal government. So it's the only one I recommend using. By law, you are entitled to one free credit report per year, from each of the three companies mentioned above.
If you request your reports through the website mentioned above, you'll be able to view them instantly. You can print them out if you want -- just have a lot of paper on hand! You can also save them as PDF documents on your computer. Make sure you do this, in case you lose the printed copy.
Review all of the line items on your reports. Pay particular attention to the various credit accounts that are listed. Make sure they're all legitimate. Keep an eye out for any negative information that might hurt your credit score (late payments, collections, unpaid bills, bankruptcies, etc.).
If you find a negative entry that's not accurate, be sure to dispute it through the reporting company's website. They are legally obligated to investigate the item for accuracy, and to remove it in a timely fashion if it's inaccurate.You need to get that stuff off your reports before you start applying for mortgage loans.
When you set out to repair your own credit score, you must start here -- and you must start early. It can take weeks to clean up erroneous information on your reports. So start today.
2. Reduce Your Credit Card Debt
Do you have a lot of debt tied up in credit cards? If so, you can improve your credit score by setting up a budget to pay down your balances. As you can see from the image below, the amount of debt you owe has a major influence on your FICO score. So if you want to repair your credit, you need to consider this factor -- and take action if necessary.
Reducing your credit card balances will help you in two ways. It will lower your credit utilization ratio, which can raise your FICO score. It also lowers your debt-to-income ratio, or DTI. This is a comparison between the amount of money you make each month, and the amount you pay toward debts.
Mortgage lenders will evaluate your DTI when considering you for a mortgage loan. If you spend a lower percentage of your gross monthly income on monthly debt (like those credit card payments), you'll be more likely to get approved for a loan.
Now you can see the overlapping benefits of this strategy. It helps you repair your own credit score. It improves your debt-to-income ratio. And, most importantly, it lifts a financial burden off your shoulders to improve your quality of life.
3. Be Careful When Closing Credit Accounts
Some people like to close older credit accounts they are no longer using, or accounts with low balances. This can reduce the likelihood of credit report errors, as well as the chance of financial fraud and identity theft. But you need to be careful about which accounts you close.
Closing your oldest account can shorten your credit history, which could in turn lower your score. Refer back to the pie chart above. You can see that the length of your history accounts for 15% of your FICO credit score. So if you want to close any accounts, it's best to start with the newer accounts and keep the oldest ones. Remember, your goal here is to repair your credit score so you can get a mortgage loan. So you don't want to do anything that could shorten your credit history -- not at this point, at least.
4. Avoid Late Payments at all Costs
This is one of the most common reasons people end up with bad credit in the first place. If you have a habit of missing payments on car loans, student loans, credit cards or other forms of debt, you must find a way to correct it. It's the kind of habit that can destroy your FICO score.
For many people, forgetfulness is the root of the issue. They simply forget to make payments. They pull bills out of the mailbox, toss them aside, and completely forget about them until they start getting late notices. If this describes you, you'll be happy to know there's an easy fix -- auto pay.
Nearly all finance companies these days will offer some kind of auto-pay / auto-debit system through which you can pay your bills automatically. Basically, this process will electronically connect your checking account to the bill-payment system of the company you send those checks to each month. So instead of having to mail checks (and forgetting about it), it happens automatically. All you have to do is keep an eye on your checking account to reconcile / verify all of the deductions.
As long as you have sufficient funds in your account, you will never miss another bill payment. This is one of the first things I recommend for people who want to repair their own credit scores. It's also one of the easiest.
You can also register your credit cards online through the company that provides the card. The service will send you email reminders when your payments are due, which will reduce the chance that you miss the payment.
Conclusion and Going Forward
It's important to realize that repairing a credit score takes time and persistence. So the sooner you can start a campaign, the better. Why go through all the trouble? Well, if you've tried to get financing lately (for a car, a home or a student loan), I probably don't need to give you any extra motivation. Being turned down for a loan because of your credit is a slap in the face, so it's probably the only motivation you need.
But if you need a little push in the right direction, let me offer you this insight. Because of the mortgage crisis that came to a head in 2008, it's a lot harder to get qualified for a home loan in 2011. Banks are requiring borrowers to have better credit than ever before to qualify for the best interest rates on a loan. They are also turning a lot of people away -- people who would have easily qualified for a loan in the past.
If that doesn't motivate you to repair your own credit score, nothing will. I wish you well on your journey to better financial health, and I hope this article helps you achieve success in this area of your life. Good luck!
