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How To Repair Credit

7-minute read

A great credit score gives you several advantages when you’re ready to buy a home, including access to lower-interest mortgage rates.

On the other hand, a lower credit score might have negative implications when you’re considering whether to buy a home. Overall, knowing and understanding your credit score can help you more successfully navigate the path to better credit.

What Is My Credit Score?

Your credit score is a numerical rating that tells a lender how responsible you are when you borrow money. High credit scores tell lenders that you pay your bills on time and you don’t borrow more money than you can pay back.

On the other hand, low credit scores might also tell lenders that you sometimes miss payments, you overextend your line of credit regularly, your account is very young, or your spending habits are unpredictable.

Equifax®, Experian™ and TransUnion®, the three major reporting bureaus, gather data on your spending habits and calculate a score for you based on your unique spending and bill-paying habits. Some factors that go into your credit score include your payment history, credit utilization, how much total credit you have, how old your account is and how often you apply for new credit lines.

Your payment history refers to how often you make the minimum payments on your credit card, auto loan and/or student loans. Credit utilization ratio refers to what percentage of your credit you use every month compared to how much total credit you have.

Don’t know your credit score? Don’t worry – you can learn your score in as little as an afternoon. By law, you’re entitled to one free pull of your credit report from all three of the major credit reporting bureaus once every 12 months. You’re also entitled to a free credit report if you receive government assistance, you believe that someone has stolen your credit or identity or you’re unemployed and plan on looking for a job soon.

Visit AnnualCreditReport.com and request your free credit report. You can also order your credit report by calling 1-877-322-8228 or by completing the Annual Credit Report Request Form and mailing it to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

What Is A Good Credit Score?

Once you know your score, you can then decide whether or not you should create a plan for credit repair. Though a higher score is always better, most consumers aim to get their credit score into the “good” threshold or above. While ranges will vary slightly between the FICO® and VantageScore 3.0 score models, 850 is the highest possible credit score for both. The credit score ranges for FICO® impact may include:

  • Exceptional: 800 – 850: Applicants with “exceptional” credit get access to the best interest rates, most beneficial offers and can even secure special individualized perks and offers from lenders.
  • Very Good: 740 – 799: Applicants with “very good” credit will have a variety of options to choose from when it comes to products and pricing.
  • Good: 670-739: According to data from Experian, borrowers in the “good” range have only an 8% chance of becoming “seriously delinquent” in the future. Most borrowers are in the “good” range of credit.
  • Fair: 580 – 699: “Fair” borrowers may see higher interest rates and lower ranges of credit than their peers with “good” or higher scores.
  • Poor: 300 – 579: Lenders see borrowers with “poor” credit scores as very high risk. Borrowers with poor credit may pay a fee or deposit in exchange for credit or a loan or they may be flat-out refused by lenders. If you have poor credit, you may want to create and carry out a credit repair plan immediately.

Where Does My Credit Score Come From?

Your credit score is a combination of data from the three credit reporting bureaus. Each bureau may give you a slightly different score depending on which lenders, collection agencies and court records report to them, but your scores should all be similar. The following is a rough breakdown of how credit bureaus calculate credit scores:

  • Payment history: 35%. Your payment history includes factors like how often you make or miss payments, how many days on average your late payments are overdue and how quickly you repay an overdue payment. Each time you miss a payment, you hurt your credit score.
  • Current loan and credit card debt: 30%. Your current debt comprises factors like how much you owe, how many and the types of cards that you have and how much credit you have available. Maxed-out credit cards and high loan balances hurt your score, while low balances raise your score – assuming you pay them off, of course.
  • Length of your credit history: 15%. The longer your credit history, the higher the probability that you’ll follow the same credit patterns. A long history of on-time payments improves your score.
  • Account diversification: 10%. Creditors like lending to borrowers who have a mix of account types, including home loans, credit cards and installment loans.
  • Recent credit activity: 10%. When you open a bunch of cards or request a sudden increase in credit, creditors may believe that you’re in financial trouble. Don’t apply for multiple accounts at once, or your credit may take a hit.

How To Improve Your Credit Score

If you have bad credit, don’t panic. Your credit is something that you control, and you can change your score for the better. After you understand your credit score calculation and you know your score, use a method or series of methods from our list to start improving your credit.

Check Your Credit Report For Errors

Many Americans live with errors on their credit report and don’t even know it. According to a U.S. Federal Trade Commission (FTC) report, about one in every five consumers has some kind of “confirmed material error” on their credit report. These errors are rarely beneficial, and they lower your score when it should actually be higher.

Some of the most common errors include: 

  • The inclusion of accounts that don’t belong to you
  • A report that a closed account or a paid-in-full loan is still open
  • A report that inaccurately lists a missed payment
  • The inclusion of outdated credit utilization information 

Before you start a credit repair plan, make sure that your low credit score isn’t the result of a mistake. Pull each of your credit reports and carefully check each one for errors. Your credit reports include instructions on error reporting processes. If you do notice something that you believe is an error, your credit bureau must investigate any dispute that you make and report their findings back to you. If the credit bureau finds that the error you report is actually an error, they remove it and raise your score.  

Focus On Small, Regular Payments

Your payment history is the biggest single factor that makes up your credit score because it comprises about 35% of your score’s calculation. This means that one of the quickest ways you can raise your score is to make minimum payments on all of your accounts every month. Ideally, you should also pay off each of your outstanding credit card balances before they’re due. This lowers your revolving utilization and helps you save on interest in the long-term.

Take control of your credit cards and create a plan to make minimum payments on all of your accounts every month. Most credit card companies allow you to set email or SMS alerts to get a notification when a minimum payment is due soon, and you can even schedule auto-payments in advance with most cards so you never miss a payment date again.

If you have cards open but you don’t use them, resist the temptation to close them. Closing credit lines lowers your available credit and increases your revolving utilization percentage. Instead, charge a small item — like a cup of coffee or a pizza dinner — once a month and pay your bill off immediately.

Reduce Your High-Balance Accounts

You’ll see your credit score rise if you reduce the amount you owe on your credit cards. Your revolving utilization makes up 30% of your credit score, so it’s worth it to put any extra money in your budget toward debt reduction.

Sit down with your credit statements and make a list of everything that you owe and remember to include each one of your cards on the list. Then, take a look at your budget and look for places where you can afford to cut back. Even if you only find another $20 a month, every dollar you put toward your debt will raise your score over time.

Finally, avoid putting any extra money on your credit cards if at all possible while you reduce your debts.

Consider A Debt Consolidation Loan

A debt consolidation loan or balance transfer takes all of your outstanding debts on different accounts and combines them into a single monthly payment. Debt consolidation loans help improve your credit utilization rates, your credit mix and can help you avoid missed payments. A debt consolidation loan or balance transfer can be a great option for you if you have multiple lines of credit that you have trouble keeping up with.

You make a hard inquiry on your credit report when you apply for a debt consolidation loan. This means that your credit score will usually drop by a few points immediately after your inquiry. Focus on making on-time payments above the minimum required amount after you get your debt consolidation loan.

Work With A Credit Counseling Agency

Credit counseling agencies are companies that can help you analyze your finances and find realistic solutions for your debt and credit issues. Credit counseling agencies take a hard look at your finances and suggest opportunities where you can save. They may also contact your creditors on your behalf and negotiate your payment amounts.

If you decide that you want to work with a credit counseling agency, be picky with your selection. Some credit counseling agencies charge excessive fees that don’t impact your debt. Ask about fees, specific pricing, services and products and avoid companies reluctant to provide up-front information on their pricing structures or debt-reduction tactics.

Take Control Of Repairing Your Credit Score

The best route to a better credit score? First, know what makes a “good” credit score, which is a range between 621 – 740. Then, know what makes up your credit score, including payment history, current loan and credit card debt, length of credit history, account diversification and recent activity.

You can improve your credit score by taking the following actions or any combination of steps:

  1. Check your credit report for errors.
  2. Focus on small, regular payments and control your spending.
  3. Reduce your high-balance accounts and use credit cards sparingly.
  4. Consider a debt consolidation loan.
  5. Work with a credit counseling agency.

There’s no “quick fix” that will repair your credit overnight. However, there are plenty of small steps you can take every day that will lead to a better score over time. Visit Rocket HQSM to get the resources you need to meet your financial goals. If you have additional questions, it’s important to work with a financial advisor before making any big financial moves.

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