How to Repair and Improve Your Credit Score

credit repair

For the average consumer, when it comes to major purchases, the availability of cash to purchase the product in its entirety is not readily available. Examples of these major purchases could be an automobile, home, a new business venture, credit card application, etc.

Consequently, to enter into the business transaction, the customer needs to take out a loan and repay the loan over a set time and at a specific rate of return back to the lender for the use of their money. The interest rate can vary and range anywhere from 0% or as high as 25% plus. To make the determination on whether the business loan will be made and at what interest rate, the potential lender will rely heavily upon the individual’s credit report to see how that particular person respects and manages their credit.

A good credit report is critical to an individual’s financial outlook as it reflects more than their ability to handle their finances, but speaks loudly about their personality, maturity, integrity, etc. In fact, some employers look to their employer’s credit report as an additional indicator of their potential workplace abilities.

Another tool that the potential lender can utilize is an individual’s credit score. If you have poor credit lenders will only offer you bad credit loans which carry higher interest rates than traditional loans.

Therefore, it is important to know what is a credit report, who manages the consumer’s credit information, what a credit report is and how an individual can repair and improve their credit.

What Your Credit Report Contains

A credit report is an exhaustive listing of all of the credit cards, car loans, revolving accounts, mortgages, etc. that the consumer has conducted with a business entity that allows them to pay on time. Additionally, the credit report will indicate what accounts are currently open, what accounts are closed, what are the current balances on those accounts and what are the credit limits?

The credit report also reflects any negative items in one’s personal data and financial report, how many accounts are in good standing, and how many requests have been made by other inquiring entities in which the individual as made application for credit.

Also listed on the credit report is an individual’s personal information which lists current and past addresses, phone numbers and various ways that the their name has been used.

How to Check Your Credit Rating

There are three major companies that provide this credit report for the individual. They are Experian, Equifax and TransUnion. Each basically provide the same information but in a different format. Also, in the light of the recent financial debacle that occurred within previous years, legislation has made it possible for an individual to receive, at no cost and on an annual basis, their credit report from each of these three major credit reporting companies.

How to Fix Your Credit

The best way for an individual to repair or improve their credit report is to first of all take a look at their report to make sure that everything is accurate. The three reports should be drawn down on a yearly basis and should be looked at to make sure that there are no accounts on the report that the individual did not initiate.

Specifically, the inquiring individual should validate that, in their estimation, it is free of errors. Of importance, verify that if timely payments were made that they are reflected accordingly and that there is no reflection of delinquencies if payments were made on time. It is also important that there is agreement with the balances owed as reflected on the report and what is known to be true.

If there are any errors or there are accounts that are reflected on the report that were not authorized then a letter of dispute should be sent to the credit bureaus.

Importantly, it is paramount for the consumer to realize that the data reflected in the credit report helps to determine what the person’s credit score is. For example, one particular factor such as making payments on time is critical towards enhancing and improving one’s credit report. Possible deliquent payments can be made a challenge of the past by simply entering in on one’s computer’s calendar a reminder to pop up that a payment is due or this reminder can be accomplished through an app on the smart phone. Also, if blessed with a somewhat good cash flow, one can set up an automatic payment through a banking institution to make sure that the payment is made on time.

Another significant way of improving one’s credit standing or their credit score is to take what is owed in total and divide that figure by the credit limit. For example, if an individual has four credit cards and carries a cumulative balance of $2,500 and each of these cards as a credit limit of $2,500, then the debt to credit ration is $2,500 divided by $10,000 or 25% of your credit limit. The higher the percentage equates to a more negative impact on the credit report.

Also, it is important to reduce the balance owed on credit accounts. This can be simply done by paying more than the minimum as required by the credit card company. In fact, the best way to increase one’s credit score is to methodically pay extra on the highest paying interest credit card. Once this strategy is committed to and the card is totally paid, the same strategy is applied to the next highest interest credit card along with the additional payment that went toward the card paid off and so on.

Additionally, one may choose to get a new credit card that may provide an 0% interest introductory offer. This card can be used in the same above manner to aid in paying off cards with a high interest rate. Obviously, don’t make application for a new credit if that card requires a higher interest rate on a remaining balance following the introductory rate and it defaults to a higher interest rate than the one being paid down.

It is also important not to close those credit cards that do not carry a balance. This is a short range strategy that should be adhered to if there are plans on making a major purchase. The rational is if closed the debt ratio available, as reflected on the credit report, will be decreased.

Remember, that opening a number of credit cards at the same time may increase your credit limit, but will probably cause a negative hit on the credit score. The perception being that the individual is struggling with credit.

In addition to one’s credit report is a credit score. The credit score is a compilation of one’s credit report and uses a number of factors to determine what the credit score is of the individual.

What’s a FICO Score

One of the major credit scores is known as FICO. FICO is an acronym that is devised from the two founders, Bill Fair and Earl Isaac (Fair and Isaac Company). In 1956 they devised this system of credit accounting for risk associated with an individual based on a number of factors. Some of those factors include the potential customer’s ability to pay back their loans on a timely basis, how much is owed by the individual, years of credit history, application for new credit and the types of credit that the individual is responsible for.

In addition to FICO there are other scores available that a potential lender may review. Those particular scores are called, Vantage Score, Plus Score, Trans Risk or Equifax Credit Score. These different scores may range across the spectrum as to what is a poor and what is an excellent score. Generally a poor score ranges in the area of below 600 and an excellent score is above 750 with the high end of the scale being 850.

Finally, to improve one’s credit score it is important to be intentional about one’s financial resources. To accomplish this it is best to set up a budget and financial goals.

Setting Financial Goals

When setting up a budget it is critical that the individual realize what their total revenue stream is for the month and year. Once this has been established then it is important to go to the expense side of the ledger and put down every expense associated with one’s cost of living.

Of great importance is a line item in which you pay your self first. It is critical to set aside a certain percentage of one’s income stream into a savings or money market so that when emergencies arises the individual does not need to meet the emergency with credit but use their monies that they have set aside for a “rainy” day.

In setting up expenses, the budgeting person should use actual expenses and percentages. There are many good websites that can indicate to an individual what they should set aside for their living costs. For example 25% to 35% should be set aside for housing or shelter, perhaps 5% for entertainment, utilities 5% to 10% food, 5% to 15% medical, 5% to 10% for clothing, debts 5% to 10%, etc. Remembering that this is a budget, it is important to stay with in the confines of that amount or percentage. If the full amount is not expended it does not carry over to the next month’s budget, but is set aside as part of the saving process.

Another important function to carry out each month is to write down each cash expenditure. This is due to the fact that so often at the end of the month there is the question of where all of the money went? Therefore, with this financial log you have an accounting of all the money that was spent. Potential entries for this financial log could include the purchase of Starbucks, fast food, candy, etc.

Regardless of how small the purchase that was made it should be part of the financial log. This will not only reflect to the individual where the money has gone but will show ways that perhaps money can be better utilized in other ways.

Also, many realize that it is easy to pull out a plastic credit card to make a purchase. Often this financial process is accomplished without a second thought. To aid in controlling one’s spending, try to incorporate the discipline of just using cash. Sometimes, at least, a second thought is given when a $20 bill is used to make a purchase rather than a credit card.

As part of the budgeting process, it should also be made clear that setting financial goals should be an important twin objective. Some of those goals that could be incorporated include the commitment to reduce expenses by 10% or the reduction of one’s indebtedness by X amount or percent. Other goals could include a vacation that you are dreaming about in 2 to 5 years, goals for savings and eventually investing in retirement accounts.