How To: Credit Repair Basics

Credit repair can seem like an insurmountable and complicated task, especially for those with very poor credit. The road to repairing the damage can seem long with little or no light at the end of the tunnel. Time is the greatest ally of any would be credit repairer but there are some ways to speed the process up a bit.

First you need to understand credit repair doesn't involve secret techniques and there is no magic bullet that will give you perfect credit overnight. Unscrupulous credit repair businesses promote these ideas so that consumers will not only think they cannot repair their credit themselves, but also to convince them that perfect credit can be instantly achieved by paying outrageous fees.

There are two pieces to the credit repair puzzle: credit repair and credit rebuilding. The repair piece deals with correcting and reducing the impact of damage that has already taken place. The rebuilding piece involves the acquisition of new credit. People often focus on the repair aspect, forgetting that the rebuilding phase accounts for fifty percent of credit repair success.

REPAIR

The first step to repairing your credit is identifying the damage. To do this you must obtain copies of your credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. Law requires that the bureaus each provide one free credit report per year to consumers. You can obtain your free copies by visiting http://www.annualcreditreport.com/.

Print all of your reports so you can make notes and plan a course of action. The problems causing bad credit for most people are high credit balances, past due balances, late payments, lack of credit altogether, and seriously delinquent accounts such as charge-offs or collections. Bad credit is usually caused by a combination of all of these factors, but can also be caused by just one or two. Here are some ways to go about correcting each:

High credit balances. Carrying high balances on your revolving credit lines (credit cards, store cards, personal signature loans) has a very negative effect on your FICO credit scores. The fix for this one is pretty straightforward - pay down as much debt as you can as quick as possible. Try to keep your balances to no more than 25% of your total available credit limits.

Past due and late payments. Any past due amount showing on your credit report is a killer when it comes to your credit scores. Pay any past due amounts immediately to bring your accounts current. Late payments are part of your credit history and are not as easily corrected. Avoid any new late payments by always paying your bills on time. After six months of on time payments you can contact your creditors to ask for a "goodwill adjustment". A credit will sometimes give a goodwill adjustment and remove past late payments after a consumer has shown they made a mistake and have since become financially responsible.

Lack of credit. Next to paying down your balances, dealing with a lack of credit or thin credit file is the second easiest fix. Your credit scores are heavily influenced by the amount of credit accounts you have and the length of time you have had them. A minimum of 3 credit accounts is best, and the longer they've been open the better. Opening a few credit cards or even an auto loan and using them responsibly over time can cure this problem.

Serious delinquencies. Charged off debt, collection accounts, repossessions, and foreclosures are all considered extremely derogatory. Each type of seriously delinquent account has its own characteristics to deal with but the bottom line is you want them off your report.

For a charged off debt you can sometimes negotiate with the original creditor to pay the debt in exchange for having the debt reported as just "paid" or "paid and closed". The key is to negotiate only in writing and be sure to mandate that the account status be reported positively or neutrally, otherwise your payment may have little or no effect on your credit scores.

Collections. These can be somewhat difficult to deal with. These debts have been sold by the original creditor to a collection agency, many of which use harassment and intimidation to collect from consumers. You need to read, or at least read about, The Fair Debt Collection Practices Act (FDCPA) before dealing with these debts. The FDCPA governs how collectors must act and imposes penalties for non-compliance. Again, limit all communication to writing and make a payment only if they agree to remove the item from your report. Paying a collection and having it updated as paid on your report can sometimes cause more harm to your scores.

Repossessions. Repossessions often results in a delinquency amount which will be reported as a past due amount on the account. The past due amount not only reports a negative status but also figures into your overall credit balance. Each state has their own laws regarding repossessions. It is best to research these laws and make sure the repossession was done lawfully. If not, the repossessing company must remove the past due amount and many times the entire account.

Foreclosure. These are the hardest and most difficult to deal with. Foreclosures are often times best dealt with by contacting and experiences real estate attorney. The various state laws that apply make it nearly impossible to give a one size fits all remedy.

Dispute, dispute, dispute. Even if some of the information in a negatively reported account is correct you can dispute any an all inaccuracies. When you dispute the item with the credit bureaus they are required by law to contact the furnisher of the information and verify the accuracy of the info. If the furnisher doesn't respond the entire account must be removed. This happens often with older or paid off collections.

Time. Time is your savior. Negative information can only be reported for seven years. (Federal Tax, State Tax, Federal Student Loans, and Child Support can be reported longer) If the late payment or negative item being reported is over seven years old you can dispute it as obsolete and the credit bureaus must remove it. The Fair Credit Reporting Act (FCRA) is the law requiring this.

REBUILDING

Establishing new credit and rebuilding a positive credit history is just as important as cleaning up bad information from the past. Sometimes it is even more important because while you have complete control over the rebuilding process, the repair process and your results can vary greatly.

Rebuilding involves slowly and responsibly adding new credit accounts. Adding these accounts and using them consistently and responsibly, by making all payments on time and keeping your balances low, will increase your credit score over time. Some things to remember when rebuilding:

Quality, not quantity. You never want to apply for and add new credit that you can't use or can't afford. The inquiries generated by applying for many new accounts will drive down your score. Also, too many new accounts reduces the average age of your credit accounts which also hurts your score. It is best to add a only few accounts over the course of a year.

Pay on time, every time. This is your chance to be perfect. Make sure you always pay on time or early to avoid any new late payments. You want to keep these accounts blemish free. If you have a hard time remembering most creditors allow you to set up automatic payments so you never miss.

Credit repair and rebuilding can take time but the results are more than worth it. You'll be rewarded with better terms on new loans saving you thousands of dollars over the course of your life. Read, learn, and ask - those are the keys to credit repair. The more you know the better your results will be.