Credit Score Repair

Don’t despair if you find yourself with a less than desirable credit score and credit history.  You are human and can make mistakes.  It’s natural.  The key to this is recognize that your spending habits are out of control, your credit has been damaged, and then vow to never get yourself back in the same situation after you have gotten your credit repaired.

First, get your credit report.  Get one from all three agencies.  You get one free and then you’ll probably have to pay around $10 a piece for the other two.  It’s important to get reports from all three agencies so that you have a full picture of your credit history. 

Some companies only report to one agency.  Some report to all three.  But if you are committed to repairing your credit, you need all three so that you don’t miss anything. 

Then go over those credit reports carefully.  See the section above on how to read these credit reports.  Check to see that there are no errors such as a bill you’ve paid but that is still being shown as owed. 

People at credit bureaus are human too and make mistakes just like you!  If you don’t call attention to these mistakes, no one else will.  We’ll cover correcting those mistakes a little bit later.

The next part involves pulling out those accounts that are delinquent and making a re-payment plan.  Unless you are declaring bankruptcy, you’ll still need to pay your debts and doing so can go a long way towards improving your credit history.  Creditors will see that you are doing the best you can to get back on your feet and this improves your credibility.

If all the bills are too overwhelming for you to consider paying back at once, just concentrate on one at a time.  Break them into pieces, contact the company and let them know you are trying to come up with a repayment plan and if there’s anything they can do to help you out. 

These companies really just want their money in the long run, so they are going to be willing to help you.  Once that company is paid off, move on to the next one until everyone is paid off.

After that happens, it’s not like your credit is immediately pristine.  Late payments and charged-off accounts remain on your report for seven years; bankruptcies for 10.

Most creditors, however, look for a pattern of payment rather than focusing on one-time or rare occurrences.  That’s why consistent on-time bill payments will improve those blemishes.

As soon as you have paid off your creditors, then you can start all over again.  Follow the steps given above in the section about establishing credit.  Nothing can compare to consistent, on-time bill payments and responsible credit practices when it comes to repairing your credit. 

Experts say the average time required to rebuild one's credit to the point at which you can be accepted for a major credit card or small loan is approximately two years.

Here are some other things to consider when trying to repair your credit:

• Pay down your credit cards. Paying off your installment loans (mortgage, auto, student, etc.) can help your score, but typically not as dramatically as paying down -- or paying off -- revolving accounts like credit cards.

The credit-scoring formulas like to see a nice, big gap between the amount of credit you're using and your available credit limits. Getting your balances below 30% of the credit limit on each card can really help.

While most debt gurus recommend paying off the highest-rate card first, a better strategy here is to pay down the cards that are closest to their limits. 

• Use your cards lightly. Racking up big balances can hurt your score, regardless of whether you pay your bill in full each month.

What's typically reported to the credit bureaus, and thus calculated into your score, is the balance reported on your last statement.  That doesn't mean paying off your balances each month isn't financially smart -- it is -- just that the credit score doesn't care.

You typically can increase your score by limiting your charges to 30% or less of a card's limit. If you're having trouble keeping track, consider using a check register to track your spending, logging into your account frequently at the issuer's Web site, or using personal finance software like Microsoft Money or Quicken, which can download your transactions and balances automatically. 

• Check your limits. Your score might be artificially depressed if your lender is showing a lower limit than you've actually got. Most credit-card issuers will quickly update this information if you ask.

If your issuer makes it a policy not to report consumers' limits, however -- as is the usual case with American Express cards and those issued by Capital One -- the bureaus typically use your highest balance as a proxy for your credit limit.

You may see the problem here: If you consistently charge the same amount each month -- say $2,000 to $2,500 -- it may look to the credit-scoring formula like you're regularly maxing out that card.

You could go on a wild spending spree to raise the limit, but a more sober solution would simply be to pay your balance down or off before your statement period closes.

Check your last statement to see which day of the month that typically is, then go to the issuer's Web site about a week in advance of closing and pay off what you owe. It won't raise your reported limit, but it will widen the gap between that limit and your closing balance, which should boost your score. 

• Dust off an old card. The older your credit history, the better. But if you stop using your oldest cards, the issuers may stop updating those accounts at the credit bureaus. The accounts will still appear, but they won't be given as much weight in the credit-scoring formula as your active accounts.  That's why many financial companies recommend to their clients that they use their oldest cards every few months to charge a small amount, paying it off in full when the statement arrives.

• Get some goodwill. If you've been a good customer, a lender might agree to simply erase that one late payment from your credit history. You usually have to make the request in writing, and your chances for a "goodwill adjustment" improve the better your record with the company (and the better your credit in general). But it can't hurt to ask.

A longer-term solution for more-troubled accounts is to ask that they be "re-aged." If the account is still open, the lender might erase previous delinquencies if you make a series of 12 or so on-time payments.

When trying to improve your credit score or credit history, avoid any of the following:

• Asking a creditor to lower your credit limits. This will reduce that all-important gap between your balances and your available credit, which could hurt your score. If a lender asks you to close an account or get a limit lowered as a condition for getting a loan, you might have to do it -- but don't do so without being asked.

• Making a late payment. The irony here is that a late or missed payment will hurt a good score more than a bad one, dropping a 700-plus score by 100 points or more. If you've already got a string of negative items on your credit report, one more won't have a big impact, but it's still something you want to avoid if you're trying to improve your score.

• Consolidating your accounts. Applying for a new account can ding your score. So, too, can transferring balances from a high-limit card to a lower-limit one, or concentrating all or most of your credit-card balances onto a single card. In general, it's better to have smaller balances on a few cards than a big balance on one.

• Applying for new credit if you've already got plenty. On the other hand, applying for and getting an installment loan can help your score if you don't have any installment accounts, or you're trying to recover from a credit disaster like bankruptcy.

By the way, all these suggestions work best if you have poor or mediocre scores to begin with. Once you've hit the 700 mark, any tweaking you do will tend to have less of a positive impact.

And if your scores are in the "excellent" category, 760 or above, you'll probably be able to eke out only a few extra points despite your best efforts.

There's really no point, anyway, since you're already qualified for the best rates and terms. Here's one area where it's really OK to rest on your laurels and worry about something else.

If you are in serious, serious credit problems, sometimes the only solution is to file for a bankruptcy.  This is a last-ditch thing, though, and should only be done if you’ve dug yourself in so deep that the odds of getting out of debt are little to none.