If you’re currently considering credit repair, chances are you’ve experienced one of the following scenarios:
- You were recently denied a credit card, a loan, or some other debt product. The letter of rejection revealed that your score was much lower than you thought.
- You’ve made a series of financial missteps in the past and are certain your credit is in shambles.
- Your credit card issuer raised your interest rate or lowered your credit line. This was due to a steep dip in your credit rating.
- You were turned down for your dream job because of credit-related issues. (Yes, some employers do check the credit history of prospective employees).
- You were unable to qualify for auto insurance because you posed too much of a credit risk.
A poor credit rating can cost you a fortune and take several years to rectify. But the good news is that you can stop running from your credit woes and start your credit repair journey. You may not see results right away, yet taking action beats waiting around for those negative items to fall off your credit report.
Read on to learn more about your credit repair options and for tips to get your credit in tip-top shape.
How Do I Fix My Credit Rating?
Before we get into the nuts and bolts of credit repair, it helps to know why it’s even worth the effort. A poor credit rating could have serious implications for your financial well-being. For example, you may be denied that dream job, or if you find yourself in a financial bind, you may not qualify for a zero-interest credit card or a personal loan.
And if you are able to secure a loan, you may only qualify for one at a high interest rate. (This is common with subprime loan products). So you’ll be throwing away money on interest payments that could be better used to reach your financial goals.
How Your Credit Score is Calculated
The first step to repairing your credit is figuring out where the problems lie. Your FICO score is a good indicator of how you’ve managed credit in the past and is based on the contents of your credit report.
There are five components to your FICO score:
1. Payment history (35 percent of your score)
This is the largest and most significant component of your credit score. Lenders want to know that you can handle your debt and make timely payments each month. Otherwise, you pose too high a risk, because there’s a good chance you’ll default on the debt and cause them to sustain significant losses.
Unfortunately, making one late payment can send your credit score plummeting by up to 100 points. Late payments also affect your credit score for two years. The impact will diminish over time, but a negative mark will linger for seven years.
One late payment usually isn’t the end of the world. But consistently letting an account reach a delinquent status will hurt your credit score. Ultimately, the creditor will deem the account uncollectible. At that point, it becomes a collection item and is turned over to a collection agency. Collection items remain on your credit report for seven years.
The good news is, the creditor usually won’t report an account until it’s 30 days past due. So if you make a payment 15 days after the due date, you may be charged a late fee, but the account won’t be reported to the credit bureaus.
2. Amounts owed (30 percent of your score)
The percentage of your debt that is in use is known as your credit utilization ratio and is the basis of amounts owed. The higher the ratio, the greater the impact on your score, as it indicates to future creditors that you may be overextended.
For instance, if all your revolving debt or credit cards have a total credit limit of $35,000 and you currently owe $25,000, your debt utilization ratio will be around 71 percent. Most creditors prefer to see this number at 30 percent or lower, so you would want to pay down the balance to help boost your credit score.
Installment loans, such as mortgages, car loans, and student loans, don’t have as much of an impact on the credit utilization ratio as does revolving debt. Still, it doesn’t hurt to pay down the balances.
3. Length of credit history (15 percent of your score)
How long have you been in the credit game? The longer your payment history, the better lenders can gauge if you have experience managing debt and credit products.
4. Credit mix (10 percent of your score)
Do you have an adequate mix of both installment debt and revolving credit? Lenders like to see a healthy mix of both.
5. New credit (10 percent of your score)
Each time you apply for credit, a hard inquiry is generated. This sort of inquiry affects your credit score by two to five points and remains on your credit report for up to two years. However, your score will be affected for only 12 months.
If you apply for several credit cards at once, your credit score may take a hit. Even worse, your applications could be denied, because lenders could perceive you as desperate. Mortgage and auto loans are exceptions to the rule.
The FICO model allows you to do what’s called rate shopping. As long as you select a loan product within a 15- to 45-day window (depending on the type of debt), all the hard inquiries will be grouped into a lone inquiry, according to myFICO.
Once you’ve identified the problematic areas on your credit report, you’ll know what to focus on when you start the credit repair process. But keep in mind that your credit scores from the three credit bureaus, Experian, Equifax, and Transunion, may not be the same, since different scoring models are sometimes used.
Quick note: FICO is the most prevalent credit scoring model. It’s used by 90 percent of lenders to make a credit decision, myFICO.gov says. But there are also FAKO scores, which are alternative credit-scoring models.
Hire a Credit Repair Company
If you’re uncomfortable handling credit repair on your own, you can hire a company to do it for you.
Before evaluating your options and signing up with a credit repair company, the FTC recommends that you be mindful of the following:
- Under the Credit Repair Organizations Act (CROA), credit repair companies are required to discuss accurate information regarding what services they can perform for you, and payment cannot be collected until after services are rendered. The CROA also outlines the legal remedies available to you if the credit repair companies default on the agreement.
- You can file a formal complaint with your state attorney’s office or the FTC if you encounter problems.
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How Credit Repair Works
Credit repair involves disputing inaccurate or dated information on your credit report. It also includes other tactics, like goodwill adjustments or settlement agreements between the creditor and consumer. The ultimate goal is to have negative marks removed to boost your credit rating. (More on that shortly).
You have two credit repair options:
- Do-it-yourself credit repair
- Hiring a reputable credit repair company
Next, we’ll address what each option entails so you can decide which option is best for you.
How Can I Fix My Credit Myself?
“Anything a credit repair company can do legally, you can do for yourself at little or no cost,” according to the Federal Trade Commission. If you’re ready to get started with credit repair on your own, take the following actions:
Step 1: Get a Free Copy of Your Credit Report
You can get a free copy of your credit report from each of the bureaus once a year. It’s also possible to retrieve your credit report free of charge if:
- You’ve recently been denied credit, insurance, or employment and you request a copy within 60 days of the decision being rendered.
- You’ve been victimized by identity theft or have fraud on your credit report.
- You’re unemployed and plan to seek employment in the next 60 days.
- You’re a recipient of welfare.
Step 2: Review All the Contents
Carefully review each entry in your credit report to confirm it’s accurate. If you spot errors, circle or highlight them so they’re easier to identify when it’s time to file disputes. (See below). Also, highlight all the negative items and accounts that are listed. (We’ll also be addressing those in Step 4).
Step 3: Dispute Errors
“No one can legally remove accurate and timely negative information from a credit report,” according to the FTC. Therefore, credit bureau disputes are reserved for errors or dated information that should no longer be on your credit report. Otherwise, you run the risk of your dispute being classified as frivolous and thrown out by the credit bureaus.
You can dispute errors by:
- Drafting a letter to one of the three credit bureaus, explaining why the information in your credit report is incorrect. Your letter should include your full name and address, a description of the item in dispute, why it’s inaccurate, and a request for it to be rectified or removed. The credit bureau will then notify the other two bureaus. Find a handy template for your letter at FTC.gov.
- Providing your creditor with adequate supporting documentation. This includes a copy of your credit report with the error circled or highlighted, along with any other documentation that proves your case.
- Contacting the creditor or collection agency directly. You may be able to solve the problem without filing a formal dispute with the credit bureaus by speaking with a customer service representative. If you’re successful, be sure to jot down the representative’s name for your records.
- Submitting your dispute online or via snail mail. Copies of your dispute letter and any supporting documentation should be uploaded to the online dispute dashboard or sent via certified mail with a return receipt to both the creditor and the credit bureaus. You’ll want to keep the originals, since documents sent to credit bureaus seem to get lost in the shuffle more often than not. And a return receipt will let you know that your dispute has been officially received.
- Following up if you haven’t received a response within 30 days.
Once your dispute has been received, the credit bureau has 30 days to launch an investigation with the creditor and communicate the results to you. Otherwise, the information must be removed from your credit report. If your dispute is denied but you know that the information is inaccurate, resubmit with additional supporting documentation.
Step 4: Devise a Plan to Tackle Negative Items
The more negative items you can get removed, the better. Below are some suggestions to help you get started:
Type of Negative Item
- Late payments: They appear on your credit report once an account is past due by 30 days or more. They remain on your report for up to seven years, but the impact diminishes over time.
- Collection accounts: These result from unpaid accounts that have been turned over to collection agencies to recoup the amounts owed. They remain on your report for up to seven years, but this time frame can be reset by the date of last activity.
- Charge-offs: These occur when the outstanding debt obligation is written off because the creditor has decided it is no longer collectible. They remain on your credit report for up to seven years.
- Repossessions: These remain on your credit report for seven years.
- Evictions: These are noted under public records and stay on your credit report for seven years.
- Judgments: These occur when you are taken to court to recoup unpaid debts. They remain on your credit report for up to seven years.
- Tax liens: There is no limit to the amount of time that tax liens can remain on your credit report if they’re unpaid. Once you repay them, they’ll be removed within seven years.
- Bankruptcies: Chapter 7 (discharge) and Chapter 13 (reorganization) bankruptcies remain on your credit report for 10 and seven years, respectively.
Credit Repair Strategies
- For late payments
Contact the creditor directly and ask that it remove the late payment. This is called a goodwill adjustment. If negative item is the result of an honest mistake and isn’t a recurring issue, you may have success.
- For collection accounts and charge-offs
Proceed with caution if the same debt is listed with multiple agencies. It may be worthwhile to file disputes and only deal with the collection agency that can actually validate the debt.Contact the original creditor or collection agency and request a pay-for-delete agreement in exchange for a monetary settlement that’s less than what you owe. (Be sure to get the details in writing).Keep in mind that paid and unpaid collections have the same impact on your credit rating. So it may not be worthwhile to touch the debt. Plus, you run the risk of resetting the statute of limitations.
- For repossessions, evictions, judgments, tax liens and bankruptcies
You can dispute these items if they appear to be incorrect or questionable. But if they’re accurate, it may be best to focus on other areas of your credit report and let them run their course, because they are among the hardest negative items to get removed from your credit report.For more complex items, you can hire an experienced credit repair lawyer, who will hopefully be able to get the results you’re looking for.
Bonus tip: If you have several negative items on your credit report that you’d like to have removed, you can submit a letter to the credit bureaus asking them to verify the debt. You may find that the creditor doesn’t bother to respond and the item will subsequently be removed from your credit report. This is especially common with smaller or older collection items that the creditor or collection agency decide are not worth the hassle of responding to the dispute.
Credit Repair Software
There are also several credit repair software programs you can buy to help with DIY credit repair. Most come with detailed instructions and customizable templates to streamline the credit repair process.
Other Credit Repair Tips
Beyond the credit repair tactics mentioned above, there are several other ways to start improving your credit rating that don’t include writing letters and calling creditors:
- Get current and stay current on all your debt obligations.
- Ask your credit card issuer for a credit limit increase to lower your credit utilization ratio.
- Use existing credit cards responsibly to avoid increasing your debt load.
- Pay down your debts to reduce your credit utilization ratio.
- Get a secured credit card or loan to start rebuilding your credit rating.
- Consolidate your debts to streamline the repayment process.
- Get a credit-builder loan.
- Refrain from applying for too much credit at once.
- Become an authorized user of someone else’s credit card.
How Much Does it Cost to Repair My Credit?
Credit repair prices vary by company. On average, they start at $59 per month. Also keep in mind that you may have to pay an administrative fee to get started.
How Long Does Credit Repair Take?
The length of time in which you should expect to see results depends on several factors, including:
- The types of negative items on your credit report.
- The extent of damage done.
- How responsive the creditors are to your disputes or settlement, goodwill, or pay-for-deletion requests.
- How persistent you are with the credit repair process.
While it’s possible for your score to start climbing within a few months, you should also be prepared to wait out some of the items if they are accurate and timely and you have no basis to dispute them or the creditor isn’t budging.
Is Credit Repair Legit?
Are you having second thoughts about hiring a credit repair company to help boost your credit rating? Perhaps you’ve thought to yourself, Will credit repair work, or is my track record too damaged?
It’s understandable, considering there are scores of scam artists out there making inflated promises and itching to take your money and run. But you can avoid credit repair scams by looking for red flags. The FTC warns against statements such as:
- “Credit problems? No problem!”
- “We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!”
- “We can erase your bad credit — 100 percent guaranteed.”
- “Create a new credit identity — legally.”
A better option: Consider just those companies that are Better Business Bureau certified and have a stellar track record. Also, read credit-repair-service reviews to see what other people are saying. If the bulk of the reviews are negative or seem too good to be true, axe them off your list.
How Do I Fix My Credit to Buy a Home?
If you’re looking to repair your credit solely for the purpose of buying a home, you should:
- Meet with mortgage lenders to determine qualification criteria. This will give you an idea of the minimum credit score you need to qualify for a loan.
- Start repairing your credit on your own using the guidance we’ve provided above, or hire a credit repair company to do the legwork for you.
- Remain persistent during the process and inform creditors or the credit repair company that you’re looking to purchase a home, so they’ll understand the urgency of your request.
- Revisit prospective lenders once your credit rating has improved to determine if you prequalify or need to take additional action with regard to your credit or finances.
These tactics also work if you’re trying to secure another type of loan product, such as an auto loan.