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.
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
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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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?
If you liked this site then you might like some of my other sites:
How to Find Cheap Airfare How to Save Electricity How to get listed & ranked well in Google
Entire site ©1999-2011
Michael Bluejay Inc. • All information is "use at your own risk" Contact
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