Repairing
your credit
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This page
will tell you everything you need to know about
improving your credit score. If you
haven't already read my introduction to Credit
Reports & Credit Scores, I strongly suggest
you read that first.
Credit scoring
myths
Myth:
Checking my credit score or getting my
credit report hurts my credit
score.
FACT:
No, it doesn't. Inquiries about your
report for the purpose of establishing
new credit can decrease your score a
little bit, but inquiries to just get your
score or a copy of your report never hurt
your score. And even though inquiries for
the purpose of establishing new credit
reduce your score, they don't reduce it by
very much.
Myth:
Closing credit card or merchant accounts
will help my credit score.
FACT:
Closing accounts generally won't raise
your score. People have heard, quite
correctly, that sometimes having too many
open accounts can hurt your score. That's
true, but once you already have the open
accounts it's too late. If you close
accounts now then your ratio of
outstanding debt to credit available will
rise, which will probably
negatively impact your score.
Now, if your
lender asks you to close an account
or two as a condition of getting the loan,
then go ahead and do so. You're not doing
so to raise your score, because it
doesn't, you're doing so because your
lender says that what it takes for you to
get the loan. The reason they might do
this is because they're afraid if you max
out all your various cards you'll be
spread too thin and won't be able to pay
back the mortgage. So they may want you to
close an account or two to reduce your
ability to rack up more debt. But you
should close accounts only if your
lender says you need to do so in
order to get the loan. If a mortgage
broker suggests you do so, ignore
them.
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How to improve your
credit score
As you know from the Credit
Reports & Scores page, you
improve your credit score by cleaning up
your credit report. Below are the
tried-and-true ways to clean up your credit
report. This is truly everything you need to
know. Don't pay for credit repair services,
because they can't do anything for you beyond
what's listed here.
Late
payments &
collections
Don't
make any (more) late payments. Make
sure you pay every bill on time from here on
out. Taking steps to bring your score up does
you no good if you do things that send it right
back down. Also, the older a late payment is on
your credit report, the less it hurts you. So a
late payment you made last month hurts a lot
right now, but in two years that same late
payment won't hurt your score as much. If you
make no more late payments, your score could
improve 50 points within a year.
Pay off collections. If you have a
delinquent account, pay it. That won't remove it
from your credit report, but it will still help
your score, because a late payment is not
nearly as bad as an unpaid debt.
Correct errors. If there are any
errors on your report (such as late payments
when you weren't late), write a letter to the
CRA in question and ask that the error(s) be
removed. The CRA has 30 days to investigate;
they'll write to the creditor and ask them to
verify the payment info. If they don't, the CRA
will remove the negative info from your
file.
Make sure negative info older than 7 years isn't
reported. By law, negative
information in your credit report must be
deleted after seven years (10 years for
bankruptcy). If your report contains negative
info that's more than seven years old, write the
CRA and ask them to remove it. Also note that if
you missed a payment 8 years ago, but it took
the creditor 2 years to report it to a
collection agency, it will likely show up on
your report as a 6-year-old debt. In that case,
write to the CRA and explain that the debt is
really 8 years old and should be removed.
Include a copy of any paperwork that supports
your claim.
Add your side of the story. If there
is negative info in your report (such as
non-payment of a debt), but you have a good
reason for not paying the debt (merchandise not
received, legitimate dispute with the merchant
who would not negotiate in good faith, etc.),
write to the CRA and ask them to add your short
explanation about the matter to your file. If
the lender pulls your credit report they might
see the statement you added. They might not see
it, because some lenders just look at the credit
score and don't scrutinize the report itself too
closely, but it couldn't hurt.
Paying down
debt
Pay down loans. The more debt you're
carrying, the lower your score. Your debt is
evaluated in comparison to the total credit
available to you. So $1000 of total debt with a
$1500 total credit limit (1000/1500 = 67%) is
probably worse than $3000 of debt with a $10,000
limit (3000/10,000 = 30%). So pay down your debt
to increase your score.
Once I made a single $11,340 purchase
on a card with a $12,000 credit limit. Even
though my total credit available was about
$188,000 on all my cards and I had only a few
thousand dollars outstanding on my other cards,
that one purchase near my credit limit on that
card plunged my scored nearly 70 points from 825
to 757 in a single month. However, once I paid
off that charge, my score zoomed right back up
by 68 points the very next month.
The power
of time
Wait. Credit scores get better with
time, just like wine. The older a late payment
is, the less it hurts you, and the older a
credit card account is, the more it helps you.
If nothing else changes, your credit score will
gradually creep up on its own.
Getting
credit if you don't have
any
Get and use a credit card. In most
cases you need to have (and use) at least one
credit card in order to have a good credit
score. If you don't have one, get one. Just use
it to buy your groceries, and pay it off in full
every month. Here's more on getting
a credit card.
 Ignore
everything else
Ignore most other advice you hear.
Myths about what actually helps or hurts
your credit score would fill a book. Some of
them are listed in the sidebar above. Some of
them are even espoused by people whom you'd
think would know better, like mortgage brokers.
But the list you're reading now is all you need
to focus on. Be skeptical of any other advice
you may hear about how to improve your score. If
it sounds legitimate and you want to believe it
then try to verify it first somehow, don't just
accept it on faith. Because taking bad advice
might not just fail to improve your score, it
could actually hurt it. Really, just correct
errors, get old negative items off your report,
maintain a good payment history, and don't max
out your credit, and that's pretty much all you
need to do.
Don't pay for credit-rebuilding services.
The tips in this section are
everything you need to know about
rebuilding your credit. There isn't anything
else. Nobody can do anything more for you than
what I've listed above. Don't throw your money
away on credit repair services.
Examples of credit score
improvement
Here are some concrete examples of
how various actions could affect a credit score
of 670 in either direction. This came
directly from the MyFICO simulator in 2008,
except for the item about maxing out your
credit, which I estimated from my own
experience.
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How
various actions affect a credit score
of 670
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Action
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New
Credit Score
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Pay off all of a $2100 outstanding
balance
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730-770
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Pay down 2/3 of a $2100 outstanding
balance
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710-750
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Pay down 1/3 of a $2100 outstanding
balance
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670-710
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Consolidate balances onto a new card
with a $5000 credit limit
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685-725
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Consolidate balances onto a new card
with a $1000 to $3000 credit limit
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675-715
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Pay all bills on time for next 12
months
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690-720
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Pay all bills on time for next 6
months
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690-720
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Pay all bills on time for next 3
months
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670-690
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Pay a bill late
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610-645
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Max out your credit (charge $11,000
to a card with a $12,000 limit)
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580-620
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Declare bankruptcy
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500-550
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Note that another way to say "Pay all bills
on time" is simply, "Wait." Paying promptly is
the same thing as doing nothing bad. If you're
not doing anything to sabotage your report, then
you're basically just biding time. And as time
passes, your credit score will go up. A lot.
Should I wait for an item
to expire off my report before I apply for a
loan?
Late payments are removed from your
credit report once they're over 7 years old.
Bankruptcies are removed after ten. If it's only
going to take a few months for a negative item
to expire off your report, and you don't have a
specific dream house in mind that you want to
buy right now, then sure, go ahead and wait for
the bad item to expire before applying for a
loan, so you'll have a higher credit score and
get a better interest rate.
But what if you have found your
dream house that's on the market right now?
If you don't buy it now, someone else will
probably buy it while you're waiting for your
credit report to improve. In this case, figure
out how much extra you'll pay because of the
higher interest rate, and see if you're willing
to pay that premium in order to get your dream
house. And remember that once your score
improves, you can always refinance at a better
rate later on.
If it's going to take a couple of years
for your credit score to improve, and you're
able to get a loan now, you should probably do
so rather than wait. Yes, you'll pay more
interest, but you'll start your investment in
your house that much sooner, which will balance
out the extra interest you'll pay. And once your
credit score improves, you can always refinance
at a lower rate.
Links
MyFICO offers a credit
education center and some interesting
credit
statistics.
Where to
now?
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This page last updated in October
2008
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