This blog is part of the blog series “How to fix your credit”
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How to Fix your Credit
Having a bad credit score makes life difficult. Learning how to fix credit scores will make life cheaper and easier. Banks use credit reports to alert one another to customers that may be a high risk. This makes credit cheaper for those with a good score, but makes credit more expensive, if not impossible, for those with bad scores.
The good news is that you can fix the problem. If you learn how credit scores are calculated and take the right steps, you can get your score back up to a level where you can open a bank account and even take on new debt. This article will teach you how to erase a bad credit history and improve your credit.
Why you should fix your credit
A bad credit score does not just mean you cannot borrow money or get a mortgage. It makes life more expensive and more difficult.
- If your credit score is low, you may not be able to open a bank account.
- Not having a bank account puts you at the mercy of loan sharks and money transfer agents who charge much higher interest rates and transaction fees.
- A bad credit score can lead to utilities and landlords demanding a higher security deposit.
- Some insurance companies will not insure you if you don’t have a bank account, and many charge higher premiums if you have a bad credit score.
- Having a good credit score allows you to build up an excellent credit score, and an excellent credit score gives you access to the cheapest credit.
There are three credit bureaus in the United States; Equifax, TransUnion, and Experian. Each one maintains a Fico credit score which ranges between 300 and 850. A score above 760 is excellent, and 850 is a perfect score. A score between 600 and 760 would be fair to good, while a score below 600 is a bad credit score. The scores calculated by each bureau may differ as they use different data and may update the score at differing times.
ChexSystems is a report used by banks to maintain a record of check account holders that have bounced checks, abused their ATM account or committed check account fraud. Any incidents involving a checking account are reported to ChexSystems and will stay on the report for five years.
The main reason for someone in the US not having a bank account is a history of bounced or unpaid checks. Having a ChexSystems record will not necessarily affect your credit score, but will make it difficult to open a new checking account, and this makes it difficult to build a strong credit rating.
What affects your credit score?
Before learning how to repair a credit report, it’s worth learning how credit scores are calculated. A credit score is a measure of how responsible you are when it comes to managing your debt. It considers how much you use available credit, whether you pay on time, and how long your credit history is. If your score in these areas is good, you will have a good score. If not, you will have an average score.
Having debts charged off or sent to a collections agency will give you a really poor score. Moreover, declaring bankruptcy or being convicted of fraud will have the biggest negative effect on your score.
Types of unpaid accounts
A past due account is an account that has not been paid on time. This is the least serious type of unpaid account, but can still have a negative effect on your credit. A charged off account is an account or bill that is more than 180 days overdue. This will usually mean the company will either write the debt off or send it to a collection agent. Collection accounts are accounts that have been handed over to another party for collection. Accounts are usually handed over to a collections agency after they have been charged of,f but may be handed over before then. Collections accounts and charged off accounts will both have a serious effect on your credit score.
Steps to fixing your credit
Learning how to fix credit is the first step in repairing your credit. Beyond that, repairing your credit requires addressing everything that is affecting your score. You cannot address some of the problems and ignore others. However, there is a logical order to approaching the issue. These are the steps you can take to improve your score:
Get your free credit report
The first thing to do is to find exactly why you have a bad credit score. You may know of some bills that you haven’t paid, but there may be other problems that you are not even aware of. And, they may be incidents that are there in error.
You can get a free credit report from each of the credit bureaus every 12 months. You can also get credit reports from all the bureaus from AnnualCreditReport.com. A credit report doesn’t include your FICO score, but it will include all the information used to calculate the score. It’s important to make sure all this information is accurate before moving forward.
If you do have a credit card account, your credit score will usually be on your statement. If you don’t, a non-profit credit counsellor will often have access to your credit score. You can also buy your credit score from each of the bureaus, or you can buy all three from www.myfico.com.
Dispute any errors
If there are any errors or amounts that you dispute, the next step is to get these addressed and removed from the report. Even if the errors are no fault of yours, they will continue to hurt your credit as long as they remain on the report. You will need to contact the company who are alleging the unpaid amounts and ask them to clear the report.
Pay off debts and negotiate for your listing to be removed
Sometimes companies will write off a debt if you haven’t paid it within 180 days. It may be tempting to see this as a win, but it is not. This could affect your credit score for the next five years. You should be spending the next five years building up a good credit score, not waiting for bad debt to fall away.
If you have been reported for not paying a debt, it’s only fair that the company you owe money to removes your name when you do pay. Negotiate with them and agree to pay the debt, if they will give you a letter stating that the entry will then be removed from the report. Once you have paid the outstanding amount you can send proof of payment, along with the letter, to the credit bureaus.
You may need to follow up to make sure that these entries are removed from your reports. Once again, the entry may stay on the report until you make sure it is removed.
Don’t move debt around
If you use one credit card to pay off another one, it will hurt your credit score. Your overall debt will not decrease, and you will be maintaining higher balances. So, while it may seem like you are buying yourself time, you will be doing more damage to your credit score.
Secured Credit Cards
While moving debt around is not a good way to improve your credit score, you can use your spending to improve your credit. Secured credit cards are credit cards that require you to deposit your limit upfront. If you don’t qualify for a credit card, you may be able to get a secured credit card. And, if you pay off the balance on time each month, your credit score will improve.
But, you do need to do your homework before applying for a secured credit card. Not all issuers report your payment history to the credit bureaus and some will flag your card as a secured card. In both these cases, having the card isn’t going to improve your credit score. Find out which issuers are going to help you improve your credit score first. You should also avoid issuers who charge a registration fee or insurance on the account – there is no reason for a bank to charge for either of these.
Credit-Builder Loans and Secured Personal Loans
You can also use savings and assets to improve your credit history. If you have money in a savings account, you can borrow money using that account as a deposit. If you don’t pay it back, you will lose the deposit, but the lower risk will also bring the interest rate you pay down. The only reason to take out a loan like this is to improve your credit score, so make sure the bank will actually report when you repay the loan on time.
If you don’t have saving but do own a car, a house or any other asset you can borrow money against the asset via a secured personal loan. Just make sure you can pay the loan back, or you will lose your car or whatever asset you have pledged as collateral. And, again make sure your repayments will be reported to the credit bureaus.
Keep old and unused accounts
If you have older credit cards or accounts, that you don’t use it’s a good idea to keep them. Removing them may shorten your credit history which will bring your score down. And, having credit available to you that you don’t use, will also increase your score.
Closing unused checking or savings accounts will not affect your credit score unless they have a line of credit attached to them. If a bank account does have a credit line attached to it, then closing it will lower the total credit available, and raise the ratio of credit used to credit available. This would lower your credit score.
Make sure all outstanding balances are below their limit
Firstly, you should get all balances below the limit and then as low as possible. As much of 30% of your score is based on how high your balances are, and whether they are above or below your limit. Make sure all balances are below their limit first, then try to reduce the outstanding balances where you can.
Be realistic about your self-discipline While having a number of well managed credit accounts will improve your score, the opposite is also true. If you are likely to max out all your accounts, you’re better off with fewer accounts. If you know that having more accounts will lead to you spending more, you need to remove the temptation.
Should you use a credit repair company?
If you type “how to repair my credit report.” into Google, you will see hundreds of ads for credit repair companies. Credit repair companies charge a fee to improve credit scores. There are two things to remember before using a credit repair company.
Firstly, they cannot do anything that you cannot do yourself. Credit repair companies can help you tackle problems, but they cannot remove judgements or a bankruptcy from your report.
Secondly, there are credit repair scams around. If a company promises they can remove negative judgements or delinquent accounts from your report, but they want you to pay them first, you should see that as a warning sign.
Now that you know how to fix a credit score, you know there is no getting around the fact that it comes down to responsible management of your debts. However, living without a good credit score or without a bank account is more expensive and inconvenient. In the long run, it is easier to find out how to erase a bad credit history than to avoid having any credit history.