Fix My Credit Score - Without Charging Me
by Kathy Batesel
Simple Steps for Fast Improvement on Your Credit Score
As a Realtor, I saw many people who were turned down for home loans. Many times, I was able to make suggestions that enabled them to raise their credit scores without resorting to credit counseling or drastic measures - suggestions their lenders hadn't even considered!
It's important to keep a good credit score, but in reality most of us have a blemish here or there on our records. In fact, paying every single bill on time doesn't necessarily mean a good credit score, either!
You'll need two things if you need to straighten out your credit quickly:
1. A copy of your credit report. You're entitled by law to one free copy per year in the U.S. Here's a description of how to get and use yours.
2. Knowledge about how credit scores are calculated and used. This hub will guide you through the information you need to know so you can review your report and make simple changes that produce big results.
When was the last time you reviewed your credit report?
How Credit Reporting Agencies and Businesses Work Together
If I'm in a business where I offer credit or rely on a person's financial soundness (like landlords must do), I can subscribe to a credit reporting service. There are three companies in the United States that form the basis of the credit reporting system: TransUnion, Equifax, and Experian are the biggest credit bureaus in the country.
I can use these companies to report whether you've been paying your bills to me on time or not. If you haven't been, I can report that you're not paying "as agreed." This is supposed to encourage you to pay on time, and punish you if you don't.
If I report that you do make your payments on time, it boosts your credit score and makes creditors like you better. They're willing to make loans to you and give you their best interest rates.
Once I've made my monthly or quarterly report, the credit bureaus I've subscribed to the Fair Isaac Corporation, or FICO*, to use the company's algorithm to calculate a "big picture" about how you do or don't pay your bills.
FICO scores consider the following topics, and give them a certain amount of importance:
- The number of credit accounts you have open. Too many or too few can harm your score. A total of about 4-7 open credit accounts is ideal.
- The kind of credit accounts you have. A home loan is more positive on your score than a credit card, for instance.
- The total amount you owe in relation to your income.
- Length of credit history with your creditors. The longer you've been making payments on time, the better your score will be.
- Your actual payment history. Late or partial payments can harm your score.
- Recently opened accounts. These may also harm your score temporarily.
Now that the credit bureaus have rated you as a consumer, they will share that rating with anyone who has a legitimate need to know it and who pays them for their services. When you apply for credit, you agree to let the creditor get this report. If I am your creditor and I like what I see, I might give you credit, and the circle begins again when I report whether you've paid me on time.
*FICO is a trademarked name that belongs to Fair Isaac Corp.
Understanding Your Credit Report
Credit companies can't just make a standard form that's easy to read! Each one issues a different form, but they contain the same basic elements:
- Your Personal Data - name, current address, other names you have used, social security number, date of birth, and a phone number.
- A Summary - This usually identifies how many open accounts you have, and whether any of them have "adverse" or negative reports. You might also see a breakdown of how much of your credit comes from each type of account - installment, revolving, mortgage, and other.
- Open Account Details - Shows the name of the company that loaned you money, how much they loaned, how much you currently owe, how often you pay, how much you pay, and whether you've had any late payments. This will also detail whether your account is a joint account or not, and when you opened the account.
- Closed Account Details - This shows the same information as above, except that it will also have a date the account was closed, and a reason why. "Closed by consumer" and "closed by creditor" are the most common reasons, though it might simply say, "Paid and closed."
- Inquiries - Credit card companies frequently submit inquiries that allow them to target consumers so they can send offers of credit. These don't impact your score unless the inquiry was the result of an application for credit that you have made directly. Too many inquiries can temporarily lower your score.
- Boilerplate - After your detailed information, you'll see several pages of information about your rights, how to address errors, contact information for the creditors who report about you. You know - all the fine print nobody reads until they discover a problem!
Negative accounts can appear in both the open and closed accounts sections. Sometimes the same debt can appear several times, which is discussed in more depth in the next section.
Have you ever filed a credit dispute?
What NOT to Do & When NOT to Pay!
When communicating with credit bureaus, creditors, and collection agencies, these steps will help you get better results:
- Conduct all your business in writing.
- Use your own letters. Avoid templates.
- Send correspondence by certified mail, return receipt requested.
- Ten Tips to Protect Yourself from Identity Theft
How to manage your paperwork so you won't be vulnerable.
- Understanding Your Credit Score Range
To fully understand the meaning of your credit score it is essential that you are familiar with the meanings of each of the credit score ranges. Credit scores range from 300 to 850 for FICO and up to 900 for other scoring methods.
Basic Steps for Improving Credit
Now that you understand how credit works, it's time to apply this information to your own credit report so you can improve credit. Here are the steps you'll take as you look over your report. (Each item will be discussed in more detail in the sections that follow.)
1. Examine personal data for accuracy. Up to 90% of all reports do contain mistakes! File a dispute using the links shown here if you discover errors in your personal data, or in the accounts shown on your report. Look for whether they're open or not, whether late payments are showing, and the amounts owed.
2. Count the number of open accounts, how long they've been open, and consider what kind of credit they're considered. Though nobody knows the "ideal" amount of accounts to have, up to 11 is a pretty safe number. If you have too few or too many, consider closing newer and/or revolving credit accounts.
3. Evaluate your amounts owed and payoff dates. If you can pay off a small balance so that it shows zero due, it can help your credit. You might want to keep the account open, however, especially if it was established several years ago.
4. Address other problems as able (bankruptcies, judgments, and late payments.) For large loans like mortgages, it's important to have no late payments in the year before your loan application date. If your credit report shows bankruptcies or judgments, you'll want to get them discharged as quickly as possible, which means paying them off and getting a letter showing that the debt has been satisfied.
Obviously, that can be easier to say than to complete, especially if it's a debt for thousands of dollars. If this is your situation, I recommend calling the company and trying to negotiate a lower amount in exchange for sending in payments sooner than they expect. Some companies will agree to take pennies on the dollar for what you owe, because it's better than making nothing at all.
If they agree, get the agreement in writing, signed by a company representative who is authorized to make these decisions on the company's behalf. During these negotiations, ask them to remove the derogatory information from your report. If they refuse, ask them to agree not to respond to the credit bureau's inquiry. Make the promised payments, and request a letter showing you satisfied their terms. It will probably still show a "charge off" on your credit, which can appear for up to seven years after it happened. However, lenders will often ignore it if it has been satisfied for a couple of years.
Before you make any payments on old debts, be aware that it can actually cause you more harm! In some locations, creditors can pursue you from the date of last activity on an account. Making a payment can extend the amount of time that they can chase you for money, which can prevent your credit from recovering several years from now.
That's why it's vital to get an authorized agreement for a settlement. Once you've satisfied those terms, you can dispute the account on your credit report. The credit bureaus must investigate a dispute you request, but if the company doesn't respond within 30 days, it will be removed from your report, even if it's a foreclosure!
Any accounts that went to collection agencies may appear several times with different account numbers. For instance, if "ABC" couldn't collect an account, they may have sold it to "XYZ Collections", who assigned their own account number. If they couldn't make progress, they may have resold it again to "Last Chance Debt Recovery," and so on. To figure out if one debt is appearing several times, look at the balances and dates. Pay off only one company and submit the letter of satisfaction to the others so they can update your report.
5. If you're in the process of seeking a loan, ask your lender to provide a model of how the steps you're able to take will adjust your score. If the model meets the lender's criteria to give you the loan, it may be worthwhile to pay a fee for them to to a "fast check" so your report will get updated more quickly. A fast check asks your creditors to provide an update about your account without waiting for their next reporting date. This means your FICO score can be raised within 30-45 days instead of waiting months for those updates to appear.
Be careful about paid credit repair agencies! Many of these companies can make matters worse. There are legitimate ways to address credit problems, and most of them can be handled without a third party. If you truly want to hire someone to fix the issues you're having, you'll need to consider how they go about fixing your problems before spending your money. Their so-called solution may be to "arrange" a payment plan with your creditors that is less than you originally agreed to pay, which means the creditor says, "Sure, we'll take what you can send" but their methods fail to bring your accounts current, so the companies you owe will all report the payments as up to 120 days late, month after month!