Summary: Credit repair doesn't have to be complicated, follow these seven steps to improve your credit score.
Do you want to apply for a loan, but you’re worried that your credit score will hold you back?
A poor credit score can be bad for your financial well-being in many ways. You might have to pay high-interest rates, or you could be rejected outright from getting a loan.
Unfortunately, you can’t go back in time to fix it. The good news is, there are ways to help repair your credit going forward.
Increase Your Credit by 100+ Points
In a recent study at Credit Knocks, we found that *48% of clients who used a credit repair company got a credit score increase of 100+ points.
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Be aware there is no way to fix your bad credit overnight and it might take some time.
Building good credit habits can repair and improve your credit. If you don’t want to be among the 15% of Americans that are turned down for a credit card due to having poor credit, then you need to work on your credit profile proactively.
I am going to discuss five steps that will help you learn how to repair your credit.
Step 1: Learn About Credit Scores
It’s crucial to understand your credit score. You can’t repair something if you don’t know the extent of the damage.
Learn about FICO scores, because more than 90% of top lenders use it to assess the debtors.
FICO credit score range is between 300 and 850, and it is usually broken down into these ratings:
300 to 579 is poor — You will almost certainly get rejected for a loan.
580 to 669 is fair — Some lenders will agree to give you credit with strict terms and conditions and on high rates.
670 to 739 is good — You can easily apply for new loans.
740 to 799 is very good — You can bargain for better loan offers.
800 to 850 is exceptional — You are preferred by lenders.
Step 2: Learn How to Read Credit Reports
Retrieve your credit reports because this is where you find the data on which FICO determines your credit score. These reports are free and can be downloaded from any of the three leading credit bureaus.
Negative items on your credit file? Our 609 credit dispute letters may be able to help get them removed.
There will be a lot of information in a credit report document. However, you will need to skim it for these five things:
Payment History: Your track record of repaying account debts. It makes 35% of your FICO credit score.
Credit Utilization: The ration of your payable credit card balances to your credit card limits. It makes 30% of your FICO score.
Credit Age: Also called the length of credit history. It is the average duration of how long all your accounts have been opened. It makes 15% of your credit score.
Credit Mix: It is the variety of your credit accounts. Mortgages, student and automobile loans, credit cards, all these different types of borrowing make credit mix. It is 10% of your credit score.
Hard Inquiries: It is the credit inquiry carried out by creditors to see and assess the credibility of the applicant before giving them any loan. It makes 10% of your credit score.
When you are on top of all this information, you will be in a better position to develop better credit habits. This will also help you in pointing out any discrepancies in your credit report.
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Step 3: Fix Errors in Your Credit Report
Consistency issues with the use of your name, address, and Social Security Number (SSN) often lead to mistakes in credit reports. Similarly, clerical and data entry slip-ups can also cause those errors.
If you find any number that doesn’t match up with the relevant documents you possess, file the dispute with the credit bureau whose report has that error.
You can file that dispute on your own or get it down via any reputable credit repair company. As per one report by the FTC, nearly 80% of people who dispute an error on their credit reports have it fixed.
There is a good chance that if you have found a discrepancy in your report, it might be due to an error.
Step 4: Build Up a Good Payment History
Getting inaccurate information corrected on your report that affects your credit is rather easy.
However, dealing with correct information that is damaging your credit score is a demanding and time-consuming process. It demands you to have good credit behavior.
This can be developed by having a good payment history. Keep in mind that you are continuously making a payment history for your future credit scores.
Getting your credit account transferred to a collection agency, repossessions, tax liens, and charge-offs all will negatively impact your chances of getting a loan.
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All these issues stem, more or less, from late payments and take years to age off from your credit report. Getting educated on how to manage your finances can go a long way to building up a solid payment history.
Step 5: Keep Credit Utilization Below 30%
A lower credit utilization percentage shows that you are far from using your credit limit. For example, if you have $10,000 in credit, but only use $2,000 of that credit, you have a healthy 20% credit utilization rate.
And if you are also paying off debt on a credit card on time, this mix of low credit utilization and timely payment could help persuade the lender to increase your credit limit. This, in turn, will lower your utilization ratio further.
Credit utilization makes up 30% of the FICO credit score algorithm. So, a lower credit utilization will go a long way in repairing your credit.
Step 6: Maintain Age of Credit
You can’t do much about the age of your credit accounts. However, avoid closing your oldest accounts if you don’t want your credit age to affect your credit score.
Also, getting an extra credit card whose payments you can manage easily will help in building the credit age in the long run.
Length of credit history makes up 15% of the FICO credit score, so it’s an important factor.
Step 7: Earn More Than You Borrow
No one wants to make late payments and earn the label of delinquent on purpose. The majority of people with bad credit end up in trouble because of poor financial planning. So, while better planning and improved credit habits are essential, it is also important that you are earning enough income to pay off your credit each month.
If you are searching for ways to make money so you don’t run into credit problems, look into work from home options to help you with your cash flow.
To help repair your credit, be mindful of your credit reports and read them for any discrepancies. Try to make your credit payments on time, and avoid using over 30% of your credit limits.
You’ll be well on the road to repairing your credit if you can follow these simple steps.
*Study found 48% of professional credit repair clients who stuck with their service for 6+ months saw an average of 100+ points to their credit score. Source.
By Christopher Liew
Christopher Liew is the creator of Wealthawesome.com, where he shares money tips and guides for his readers. He’s a CFA Charterholder who has been featured on Yahoo Finance, MSN Money, and The Motley Fool. Read about how he quit his 6-figure job to travel the world.
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