Credit Repair Guide

What Is Credit Repair?

In this guide, we’re going to take you through everything you need to know about your credit and how to improve your credit score by fixing your credit. We’ll take a detailed look at how banks and lenders view your credit and why it’s important to maintain good credit. You’ll learn how to check your credit and all of the factors that make up your credit history. Small details may be keeping you from a good credit score; we’ll tell you what those are and how you can fix your credit. By the end of this series you’ll know if you need credit repair services and exactly what that process might look like for you.

Credit Scores vs Credit Reports

To start, we’ll dive into the basics of credit scores and reports. This guide is a very important precursor to the rest of the series. It’s vital to know exactly how credit works and what’s in your credit history before you can even start thinking about a credit fix. Ads offering free credit reports, credit scoring, and credit repair are all over the airwaves, and you probably have a free credit report jingle in your head now. You might already know your credit score isn’t quite where you want it to be. In that case, credit repair might sound pretty good. Is there someone that can help you improve your credit score quickly? Not exactly.

In order to understand the concept of credit repair or the steps to take to improve or rebuild your credit score, it’s essential that you understand what credit is. You should also arm yourself with information about what goes into your credit report. You’ll need to know how credit agencies calculate your score and what that score means for your credit. By the end of this guide, you should able to answer a simple question: “How do I fix my credit?”

How Do Credit Agencies View My Credit?

There are three major companies that provide credit ratings: Experian, Equifax, and TransUnion. Each of these companies uses specific factors to give you a clear credit score. Each bureau receives information from creditors and lenders. The bureaus take this information, run it through their own calculations, and the result is your credit score. The differences in calculations shouldn’t be large enough to make a drastic difference in your score, but you should be aware that’s the reason your number could vary slightly between these three companies. Each bureau offers slightly different reports, as well, and it’s important you know how to read your credit report.

Credit Scoring Models: FICO and VantageScore

In addition, FICO and VantageScore are two scoring models that these companies use to calculate your score. Essentially, these are tried and true equations that compile the most important data and create your score accordingly. These systems weigh each area of your credit history similarly, but may judge more softly or harshly on different sections. There are even different versions within the models that will score differently. This is another factor that could slightly differ your score from one credit agency to another. None of the numbers are necessarily wrong (unless you or a credit repair agency were to spot an actual mistake); they’re just different. There’s a few other alternative credit options, but they are not widely accepted.

These are the companies that you can receive your credit score from, if you’re curious, and lenders will get your credit information from them when you apply for a new loan. Keep in mind, checking your credit score regularly can actually damage your score slightly thanks to hard inquiries. You are allowed a certain amount of hard checks per year that will not affect your credit score. You are allowed one free annual credit report per agency. However, some of them also offer plans that allow more checks per year if you pay a regular fee. Each of these agencies has a slightly different policy, so make sure that you check on that information first before you ask for a report. Your bank or credit card lender might also allow you to check your score, but not your full report, each month.

Credit Inquiries to See Your Score

Soft inquiries are possible, but do not give you a full report. An example of this might be your credit card lender or bank allowing you to see just your credit score once per month. They might include some information such as the biggest factors affecting your score, but it will not be comprehensive.

Each agency will score your credit report on a scale. You will be scored bad, average (or fair), good, or excellent depending on your credit history. The range of credit scores starts at about 300 and goes to 720 and up. 300 would be a bad score and 720 would be excellent. As the name suggests, most people hit the average or fair category which is around 630-689.

What is Credit?

No doubt you’ve heard the term, but credit can be a complicated issue. There are a lot of factors and variables that might seem mysterious. Let’s try and demystify the term “credit” and start with the basics.

Credit Basics

For the most part, credit is a term that measures your history of borrowing money and paying it back. However, there are other factors that may also comprise your credit score. For example, if you rented an apartment and weren’t able to make the payments on time, that will be reflected on your credit score. On the other hand, making rent payments on time does not improve your credit score. Why is that? Well, it’s because credit is mostly used as a way to score your reliability to pay back money that you borrowed. Many everyday bills and payments won’t affect your credit unless you neglect them. Even before you truly start thinking about using your credit, you’ll need to make sure you’re not doing anything to negatively affect it — which only means paying all of your bills when they are due.

Credit Reporting

Think of your annual credit report as a school report card. When you’re young and you have no bills and responsibilities, your score card says nothing. Let’s say you just got your first apartment. You may have been asked to have a cosigner on your lease. This is because you have no history of good or bad credit. You need someone else’s name to support the idea that you will pay your rent each month. If you don’t, your credit score and your cosigner’s credit score will eventually be affected. There’s usually a grace period for late payments. Commonly, if something is going to affect your credit,  you will receive notice before your information is sent to a debt collector. You shouldn’t be too worried about it affecting your credit score immediately if you’re late on your payment a day or two, but this is why it’s imperative to understand every transaction that you’re attaching your name to. Vendors will usually be very explicit about the amount of time you have before your information is reported to a creditor.

That’s the basic idea of credit: you tell someone that you will make a payment on time and then you do it. As you make your payments on time, you have more items to add to your credit history. Mostly this relates to loans that you have taken out for one reason or another, but there are a few exceptions (like the apartment scenario). Be sure to always read the fine print on your contracts to see when your credit will be affected.

What is My Credit History?

Now that we understand that credit is viewed as a report card, let’s talk about exactly what goes on that report card. As we stated before, the vast majority of what is included in your credit report will be related to loans. Your credit report will show all of your current debts and their outstanding balances. A large chunk of your credit score will reflect your ability to pay back those loans on time. Credit agencies and lenders will be also able to see if you’ve applied for a new loan recently and much more. Let’s break down the types of entries you will see on a credit report that affects your credit history.

What Impacts Credit History

• Open Credit Cards – Your report will show your entire history with an open credit card account. It will show how much you currently have borrowed from the account, how much you have borrowed in the past, and your history of repayment.
• Current Loans – This could include mortgages, auto loans, student loans, and personal loans. The report shows the status of each of these individual accounts. It includes the total amount you borrowed, how much you have paid, and if you made those payments on time.
• Closed Loan Accounts – Credit agencies and lenders want to see what kind of history you’ve had, even with accounts that aren’t open any longer. These will eventually fall off of your report.
• Recent Loan Applications – Credit agencies and lenders can see what types of loans you’ve been inquiring about.
• Collection Accounts – Accounts that have been neglected and are now using a creditor to collect the money from you will be reflected.
• Public Records – This includes acts of bankruptcy, foreclosures, wage garnishments, liens, and lawsuits.

Each of these areas come together to form your entire credit history. As you can see, there’s a lot to it.

How Does Debt Affect My Credit Score?

Does having debt automatically mean my credit score is bad? Absolutely not. Having debt and paying it back is one of the best ways to build your credit score over time. Having debt and making your payments on time is the single most effective way to boost or maintain your credit score. Just because you have a few loans doesn’t mean that your credit score will be negatively affected; your job is simply to keep track of those loans and pay them off on time.

For example, one person has an auto loan. Another person has a mortgage, auto loan, and an student loans. Who has the better credit? It’s all about your payment history. If the person with fewer loans doesn’t pay on time and the person with more loans does, the person with more loans will undoubtedly have a better credit score. The amount of loans you possess has nothing to do with it, though it can affect how fast your score changes. Imagine if you failed to pay all three loans for a month, vs. not paying only one loan.

However, credit agencies and lenders will know how much credit you can realistically handle. When you go to apply for a loan, lenders will get your employer information, they’ll find out how much money you make per year, and how long you’ve been with that employer. This will affect the amount of debt you can take on. If you’ve already got three loans and you’re trying for a fourth, the lender will want to make sure that you’re already making payments on time and that your yearly salary reflects disposable income to cover the new payments. If they aren’t confident that you can handle the new debt, they won’t give it to you.

What is a Credit Repair Agency?

Credit repair agencies differ from the three credit report bureaus in that Experian, Equifax, and TransUnion simply calculate and report your score. Credit repair agencies work with credit reporters in order to provide you with a fair and accurate reading of your credit. The repair agency will help you find any incorrect information such as information that is reported multiple times or out-of-date information. While it’s possible to do this yourself, the credit repair companies have experience getting the best results possible. While mistakes on your credit report are not terribly common, they do happen. This service is mainly offered for those who are trying to quickly improve their credit score. If your credit score is close to where you need it, but you feel that a small piece of information could be holding you back, a credit repair service might be able to get you back on track.

Fixing Your Credit

You can, of course, always review your credit report yourself. If you see anything on your report that you don’t agree with, you can contact the lender or bureau yourself to clear up any misunderstandings. In this case, it will be up to you to provide clear documentation showing that they have made an error. However, many individuals prefer to go through a credit repair agency in order for a professional to facilitate the repair, which may make for a smoother process altogether. This service is by no means required but can increase your chances of success.

Credit Repair Scams

With that being said, there are many credit repair scams that you should be aware of. Companies that offer a “new credit identity” or something similar are scams. Your credit score will stay with you no matter what. If someone reaches out to you and says they can give you a fresh score or wipe your history clean, it’s simply too good to be true and likely includes identity theft. For example, it’s actually fairly hard to get a new Social Security Number. In addition, companies that offer overnight fixes to your credit score are scams as well. Improving your credit score takes time and hard work, and no one can dramatically improve your score quickly.

The absolute best thing that you can do before making any choices about your credit is to be informed. The more you know about how your credit score is calculated, what type of debt you have, and what your payment history looks like means you’ll be able to make smart decisions regarding your credit future. If you know exactly where you may have gone wrong with your credit in the past, you’ll know how you can start working to improve your credit score today.

Next: What Makes Credit Good or Bad

In the next section, we will move on to who needs credit repair, and what actually makes up a good or bad credit score. Do you know exactly how you got the credit score that you have? You could be making some simple mistakes that are negatively impacting your credit score. In turn, this could harshly impact your ability to take out a loan (such as a car, home, or credit card). Check out our next section to find out exactly what you need to do in order to keep your credit score in good condition.

Image source: Flickr/CafeCredit.com