Chances are that you ruined your credit score before you knew you had one. Surprised?
Most people are.
Getting denied for a loan or a credit card can come as a big shock. But a bigger shock can be the realization that most forms of credit are off limits to you often because of one mistake you made a long time ago.
And because lousy credit can leave you short of cash with nowhere to turn but high-interest loans, it can be tempting to consider services that promise quick fixes to your credit score. Like many scams, however, these services are too good to be true.
But all is not lost. There are steps you can take to repair and improve your credit score. There are even credit repair agencies that can help you.
It starts with accessing your credit score and understanding how your credit history is working for and against you. When you access your credit score, you’ll probably see several items negatively affecting your score. In some cases, your bad credit may not even be your fault. Mistakes are often made on people’s credit reports that can damage a person’s credit rating. Luckily, errors can be lifted. Even if your bad credit rating is accurate, there are still actions that you can take to improve your score.
Repairing your credit won’t happen overnight, but anyone can achieve it. In this Definitive Guide to Credit Repair, we’ll take you through the entire credit repair process and show you how to buy that dream house or finance that dream car with your new, stellar credit score.
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Contents table:
An overview of your credit score
What is your credit score?
How is it calculated
What is a good credit score
What damages your score?
Correcting your report yourself
Using AnnualCreditReport.com to access your reports
How to analyze the reports
How to file disputes
Use an online service to repair your credit for you
Lexington Law
Sky Blue
CreditRepair.com
The Credit People
How to keep track of your credit score
How to improve your credit score
Write a goodwill letter
Request a pay and delete arrangement
Become an authorized user
Take out a credit builder loan
Consolidate credit card debt
Pay your bills on time
Keep balances low on credit cards
Don’t open new lines of credit rapidly
Consumer agencies who can help
The Federal Trade Commission (FTC)
The Better Business Bureau (BBB)
Taking the first steps to better credit
An overview of your credit score
Before you can start taking steps to improve your credit score, you first have to understand what it is and how it works. The FICO score is the most important of the different scores as most banks and lenders use it. As a result, it's what we'll be focusing this guide on.
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What is your credit score?
Your credit score is simply a number that represents your creditworthiness or, in layman's terms, how likely you are to pay your debts. The higher your FICO score, the more likely you are to pay your debts. If you have ever been rejected for a loan or during a credit card application, it was probably because your FICO score was too low.
Your FICO score is also used to determine the rates that you are offered.
Getting approved for a loan with a low credit score is possible, you’ll just pay higher interest rates than someone with a better credit rating. That is why it isn’t just important to have a “good” credit score, you want to have the best one possible so that you pay less in interest and other fees on your loan.
Your FICO score can be broken down into seven subscores:
- Classic
- Bankcard
- Personal finance
- Mortgage
- Installment loan
- Auto loan
- NextGen
The Classic score is most popular and ranges from 300 to 850. The other scores are used for everything from car to home loans.
How is your credit score calculated?
Your FICO credit score is based on your consumer credit files at the three largest national credit bureaus: Experian, Equifax, and TransUnion. FICO looks at the makeup of each of these credit files and uses a unique formula to determine your score. While we don’t know the exact formula used, FICO has told us the components of the algorithm and how important they are. Here’s what FICO looks at to determine your creditworthiness:
Your payment history
Your payment history is the biggest component of your credit score and is determined by how you pay your bills each month. Each credit bureau has records on every credit card, loan, and mortgage that you've had and uses them to determine your credit score. Ideally, you should be paying off your bill in full every month. If you pay late, these will show up in the report and your score will drop according to how late you paid and how much you owe. It’s not just enough to be in the black, however, it is important to show a history of taking out and paying off credit. If you don’t have much of a history, FICO can mark you down.
Your aggregate debt
Almost a third of your score (30%) is governed by how much debt that you owe. FICO looks at several factors when it comes to your debt burden. These are:
- Your debt to limit ratio (how much debt you have taken out compared to your credit limit)
- The number of accounts you have with outstanding balances
- The amount you owe across all of your accounts
- The amount you have paid down on installment loans
- The type of debt you have
The length of your credit history
The length of your credit history accounts for 15% of your score. The longer you have been paying off accounts for, the higher the chances that you will continue to do so. At the same time, if you don’t have a history of paying off debt, a lender can’t tell whether you are likely to start. FICO looks at two factors in particular when it comes to the length of your credit history: the average age of the accounts on your report and the age of your oldest account.
The types of credit used
The types of credit you have taken out determine one-tenth of your credit score. Consumers with a varied credit history have proven they can pay off a range of debt and are more likely to have repaid an installment loan, such as a mortgage or car loan, that is looked on particularly favorably. Bureaus also like student loans as these are an investment in your future and suggest that future income will be high. Unfortunately, credit card repayments and other payments like rent don’t old as much stock.
Recent credit inquiries
The final portion of the algorithm (10%) is governed by the amount and type of recent credit inquiries that you have made. Your score can be damaged if you have a significant number of hard inquiries (that occur when you actively apply for a credit card or loan) over a short period of time. That shouldn’t put you off shopping around for the best rate, however, as FICO considers all searches done within 15 to 45 days of each other as one search. Other inquiries, such as student loans, mortgages and car loans don’t count at all if they are less than 30 days old. Soft inquiries, such as you pulling your credit score, your employer verifying your identity or a credit company pre-screening you also do not affect your score.
What is a good credit score?
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If you want access to credit with little to no limits, you should be aiming for a FICO score in excess of 700. At this level, it is unlikely you will be turned down and you’ll also have access to the best rates. This may seem high but in 2017 over 50% of Americans had a score of 700+. A score between 500 to 600 may be acceptable if you don’t take out a lot of credit, but you may not get access to the best rates.
If 700 is the goal, where are you at the moment? The table below can give you an idea of how your credit score ranks:
300-500: Very Poor
500-600: Poor
600-700: Fair
700-750: Good
750-850: Very Good
800-850: Excellent
What damages your credit score?
There are specific items on your credit report that can negatively impact your FICO score. There is a limit on the length of time these items can remain on your report, and it is possible to have them removed. But all of the items listed below can severely dent your chances of getting the credit that you need,
Bankruptcy
Declaring bankruptcy can leave your score in tatters. So much so that if you are on the verge of bankruptcy, you should always try to seek alternatives. The only glimmer of good news is that they can only last on your credit file for ten years.
Late payments
Look above, 35% of your credit score is governed by the way in which you make payments. Unsurprisingly, then, paying late is going to have a negative impact on your score. You may get away with one missed payment but being consistently late is going to hurt your score.
Foreclosure
Foreclosure is a result of late payments on your mortgage. Get too far behind on your payments, and the lender will take back your home. This is a severe late payment penalty and one that is best avoided.
Charge-offs
A charge off occurs when a creditor removes your debt from their accounts because they consider it unrecoverable. What’s even worse, though, is that the debt is rarely written off. Instead, it is bought by a debt collection agency who pay pennies on the dollar and will chase you for the full amount plus fees. When your account is “sent to collections” it can damage your score further.
Receiving a Judgment
If you refuse to pay your bills, a creditor can have a court pass Judgment that forces you to pay. Not only does receiving a Judgment show that you did not pay your bills, but it also indicates that the court had to get involved to force you to pay. If you don’t pay after the Judgment, your score will be damaged further.
Unpaid tax liens
A tax lien is similar to a Judgment in that the IRS has established a creditor has a legal right to your money. If you have a tax lien against your name, it is impossible to qualify for new credit or to sell your home. Fail to pay the lien and it can be recorded on your account indefinitely.
Defaulting on a loan
Defaulting on a loan shows that you have not upheld your end of the bargain and are at risk of doing so again.
High unpaid credit card balances
When the second most important metric that FICO use to determine your score is your level of debt, high unpaid credit card balances are a huge red flag. If your outstanding debt is close to your limit, the damage to your score will be greater.
These are the biggest and most common reasons that your credit score is damaged, but they are not the only reasons. Any action or penalty that could negatively impact the five factors used to determine your credit score by FICO could result in a lower score. That’s why it is so important to be aware of your score and to make sure that you consider it whenever you apply for or repay credit cards or loans.
Correcting your report yourself
You can't fix your credit if you don't understand it, so don't be afraid to find an ally who can help you out.
Credit reports are not always accurate (especially if you have been a victim of identity fraud), so one way to quickly repair your score is to remove inaccurate or unfair information. The second section of this guide will look at how you can remove these items yourself.
But you will need to access your reports first. The good news is that you are entitled to obtain a free copy of your credit report from each of the three major credit bureaus every 12 months. You used to have to request reports from each of the bureaus in turn, but now you can use a free online service to get each report at once.
Using AnnualCreditReport.com to access your reports
AnnualCreditReport.com is the only site authorized by federal law to get you your credit reports from Experian, Equifax, and TransUnion for free.
Here’s how to get your reports quickly and easily:
- Visit the site and click on the red “Request your credit reports” button
- Fill out a form that asks for your name, date of birth, social security number, and current and previous addresses.
- Select the reports that you want to see (we recommend looking at them all), and then download the reports instantly.
If you wish, you can request for hard copies of the reports to be sent to you in the mail.
Analyzing the reports
Now that you have access to all three of your credit reports, you’re going to want to go through them with a fine-tooth comb to look for any inaccuracies. Inaccuracies can include:
- Debts that aren’t yours
- Debt that has been recorded incorrectly
- Late payments that weren’t late
- Other names on your report
Be aware that because lenders do not necessarily report to all three bureaus, your reports will not look identical. Don’t assume that because a repayment hasn’t been recorded in one report it hasn’t been included at all, or that if a transaction has been recorded it has been recorded correctly in every report.
So how should you go through this report? We recommend following these steps:
- Start with your personal information. Before you even look at the transactions, you should make sure that all of the personal data that the bureaus hold about you is correct and up to date. You should also check to see whether you are the only person on the account and, if someone else is listed, who it is.
- Next, go through each of the account lines one by one and make sure that: the credit is actually yours and it hasn’t been opened fraudulently, the amounts recorded are accurate, and that debt you have paid off in full has been recorded as such.
- Next, check the soft searches that have been made against your account. Make sure that you recognize all of the searches and the lenders who have made them. These will only be made when a lender believes you have requested to borrow money so searches you don’t recognize could be a sign of fraud.
- Finally, look at the negative records section of your report and check any information listed here is accurate.
Spotted a record that doesn’t look right? It’s time to file a dispute.
Filing disputes
If you find an inaccurate entry in your report, particularly if it is a negative record, you should take action immediately to have it removed. It is not always easy, but having a negative record removed can dramatically improve your FICO score.
Here are the exact steps you should take.
Send a certified letter to the agency
The first step in filing a dispute is to send a certified letter to each of the agencies in question. You have a right to have correct and accurate information in your credit report and it is the bureau’s responsibility to make sure of this. If the same accuracy is recorded in all three reports, you will need to write to all three bureaus individually.
There are plenty of dispute templates that you can use online, but some experts believe that bureaus can identify these templates and will not take your dispute seriously as a result. That’s why we recommend that you write your own dispute letter where possible.
The letter should include the following:
- Your full name and address
- Each item you wish to dispute clearly highlighted
- The facts and reasons why you dispute this item
- Copies of evidence used to support your dispute
- A copy of your report with the item in questions circled
Make sure that you send the letter certified and request a receipt so that you can track when the bureau receives your dispute.
Unless they consider your dispute frivolous, credit bureaus must do the following:
- Investigate your claim within 30 days
- Forward the data you have provided to the organization that gave them the original information
- Correct your report if the original information was inaccurate
- Provide the results to you in writing and deliver a fresh credit report that shows the information has been changed.
Credit bureaus are notoriously difficult to deal with, however, and the likelihood of you getting results on your own are slim. That’s why many consumers turn to credit repair agencies to reduce their workload and increase the chances of getting a positive outcome.
Use an online service to repair your credit for you
Filing disputes yourself requires you to fill out paperwork and jump through hoops, all for a slim chance of getting the result that you want.
The good news is that several agencies that can do all the hard work for you in return for a small fee. These companies will help you to access your credit reports from each of the three bureaus, identify issues within each report and work aggressively on your behalf to have bureaus and other organizations delete negative and questionable items to make sure that your reports are fair and accurate.
If you are looking for the best chances of success and want to have someone do all the hard work for you, we recommend the following agencies:
Lexington Law
Lexington Law is the highest ranked credit repair law firm in the country. In 2016 alone, they removed 9 million negative credit items from the reports of Americans—more than any other law firm. The firm has been operating since 1991, and offer a comprehensive credit repair service.
Key points:
- Free personalized credit consultation
- Free access to TransUnion report summary
- Free credit report review with recommended solutions
- Challenges bureaus on your behalf
- Identity fraud protection
- Ongoing assistance with your score
- Starts from $89.95 per month
- Offers 50% discount to friends and households
Lexington Law is a fully licensed law firm with over 15 years worth of experience and 30 lawyers on-hand to service hundreds of thousands of clients. The firm offers new customers free scores and free advice without having to commit to their service, as well as generous discounts to friends and family members who sign up together. Best of all, there’s no contract meaning you are free to use their service for as little or as long as you like.
Sky Blue
While not a law firm, Sky Blue is another fantastic service that Americans can use to fix and improve their credit score without having to do the work themselves. The company offers full review, dispute and ongoing services to ensure that your credit score is as best as possible. While it does not provide any services for free, it does offer customers a 90-day money back guarantee.
Key points:
- Credit repair and restoration services since 1989
- Best-in-class support
- Pro analysis and fast disputes
- Credit rebuilding services
- 90-day money back guarantee
- $59 per month or couples discount of $99 per month
Sky Blue is the perfect firm for anyone with a poor credit history or who isn’t sure that credit repair services are right for them because of the 90-day money back guarantee. They also offer a faster and more comprehensive dispute service, allowing individuals to challenge up to five items per bureau immediately. The service is much more affordable than Lexington Law and almost as comprehensive, but you may not have lawyers working on your half.
CreditRepair.com
CreditRepair.com is an online platform dedicated to repairing your credit score and improving your long-term relationship with it. Rather than just focusing on repairing your poor credit, CreditRepair.com offers three core services: repairing your past, monitoring your present and building your future.
Key points:
- Free personalized credit consultation
- Free access to credit report summary
- Free credit report valuation
- Free score evaluation with recommended solution
- Average 40 point gain in four months
- One price of $99.95 per month with 50% discount if you sign up with friends and family
CreditRepair.com is a well-known name in the credit repair industry that has partnered with some big financial companies such as Bankrate, LendingTree, and Mint.com to help their customers improve their credit. The company offers a proven online system which is designed to help you maximize your score. Previous users of the service have even seen as much as a 40 point average increase in their TransUnion credit score after just four months of membership.
The Credit People
The Credit People prove that you don’t have to pay a monthly fee to improve your credit score by offering six months of their services for a flat fee of $299, and a $19 setup fee (which is waived if you pay up front in full).
Key points:
- Option to pay monthly or one fee
- 30% average increase in credit score
- Results promised in less than 60 days
- Over 15 years of experience
- Free credit consultation
- Starts from just $79 per month
- Try their service for $19 for 7 days
The Credit People guarantee satisfaction with their work by promising results in less than 60 days and by offering a 6-month money back guarantee if you aren’t happy. The company also offers unlimited disputes, debt validation and inquiry validation, and they are certified by the FCRA.
Their record over 15 years speaks for itself. Not only have they helped customers achieve an average 30% increase in their scores, but they have also significantly improved the chances of their customers getting approved for auto loans by an average of 71%, home loans by an average of 64%, and new credit by an average of 74%.
How to keep track of your credit score
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Repairing your score isn’t enough if you want to guarantee being accepted for a mortgage or an auto loan later in life, you need to keep an eye on your credit score constantly. Here are three reasons you should use the ongoing credit monitoring services offered by all of the agencies above:
Your score won’t improve instantly
Removing incorrect or negative items from your credit report will cause your score to improve, but it won’t improve instantly. But while you would have to wait 12 months for another free report from each of the bureaus, a credit repair agency can allow you to check it every week to make sure that your score is heading in the right direction.
Your score could drop again
It only takes one negative entry on a credit report to cause your score to fall again. Should a negative mark be made against your name, irrelevant of whether it is deserved or not, you need to know about it as soon as possible so that you can have it removed if possible.
Improving your score is a lifetime commitment
Knowing what your credit score is at any given moment can help you plan for the future and identify ways to improve it over time. Aside from removing negative items from your report, there are many repeatable actions that you can take to influence your score throughout your lifetime—all of which we will cover next.
How to improve your credit score
There are a lot of choices out there, make sure you pick one of the good ones.
Do you want to make sure that you always have access to credit when you need it? Then you’ll have to focus on improving and maintaining your credit score throughout your life. Below are several tactics that you can use to improve your financial situation and ensure that your credit score is always in good standing.
Write a goodwill letter
Did you know that you can get negative items removed from your credit report even if they are accurate and fair? One way to do this is by writing a goodwill letter to your creditor that asks them to remove the record as a gesture of goodwill if you have since repaid the debt. At the end of the day, this kind of letter can’t hurt. You either get your negative information removed and get a better score or you don’t.
Request a pay and delete arrangement
If your debt is still outstanding, you can leverage it as a bargaining chip by writing to your creditor and offering to pay the balance in return for the negative item being removed from your report. There are many creditors who will take you up on this offer.
Increase your credit limits
If you want a quick fix when it comes to improving your credit score, one approach is to increase your lines of credit. Remember, a significant part of your credit score is determined by your credit utilization ratio and the higher that ratio, the more creditworthy you are perceived to be.
Become an authorized user
Another fast way to improve your credit score is to become an authorized user on the card of someone with excellent credit and a long history of paying debts on time. By becoming an authorized user, their credit card is automatically added to your credit report, which can boost your score. Some consider this a risk strategy since it requires trust between both parties. If they stop paying their bills, your score will be damaged further, and if you go on a spending spree and don’t pay your share of the card, their score will be damaged.
Take out a credit builder loan
Even if you can’t get a credit card from the major lenders, help may still be at hand from small banks and credit unions that offer credit-builder loans to help people to repair their credit. A credit builder loan works in the opposite way to a standard loan. Rather than get instant access to the money, the money is deposited into a separate account on approval which you aren’t able to access. You then need to make repayments on the loan amount every month and can only access it once you have repaid the loan in full.
Consolidate credit card debt
By taking out a consolidation loan, all of your debt is bundled into one single loan that you repay monthly. If the rate on the consolidation loan is lower than the rate on your credit card debt, you are good to go. Just make sure that you can make the monthly payment. Even if you do miss the odd monthly payment, this strategy should still do more good than harm as installment loans are looked on much more favorably by credit bureaus than credit card debt.
Pay your bills on time
It is essential to pay your bills on time whenever possible. The manner in which you pay your debts is the most important part of your credit score, so if you can build up a history of paying debt on time every month for a few years, you’ll soon see your score improving.
This starts by knowing when every single bill is due and marking them in your calendar so that you have no excuse. If you think are in a strong enough financial position, you could even set up direct payments from your bank account so that you don’t have to think about it.
Keep balances low on credit cards
Keep your credit card bills low, and you will find they are a lot easier to pay off. Not only that but, if you do miss a payment, you will also be paying less in interest. Before you make a purchase with your credit card ask yourself the following questions:
- Do I have enough cash available to buy it in cash?
- If I don’t, can I need this item?
- If I can afford it, do I need this item?
Just asking yourself those three simple questions can help cut down on the number of unnecessary purchases that you make over the course of a month.
Another good strategy is to set yourself a spending limit on the card. Don’t lower your credit limit, as this can impact your credit utilization ratio and harm your score, but just make a mental note and remove the card from your purse or wallet once that limit has been reached. If you don’t have the card to hand, you’ll be far less tempted to make unnecessary purchases.
Don’t open new lines of credit rapidly
Finally, try not to open new lines of credit in quick succession. This should be simple in some respects because you will know when you are applying for a car, home or personal loan. But it may not be obvious when you are signing up for a new credit card because of the way store cards are disguised.
Consumer agencies who can help
When it comes to repairing your credit, it is important to have advice you can trust. While we certainly hope you trust us to provide the information you need, many people feel more comfortable speaking to either of these consumer agencies who provide expert and unbiased advice.
The Federal Trade Commission (FTC)
The FTC is the government agency in charged or protecting consumer rights, and it is an excellent source of information on credit and credit repair agencies as a result. Because they deal with a lot of fraud case, however, they may be particularly cautious when it comes to enlisting third-party help even though there is nothing wrong with paying for a trusted and experienced credit repair service.
The Better Business Bureau (BBB)
While it is not a federal agency, the BBB is still a consumer advocacy agency that is dedicated to helping consumers get the best deal, and they collect information and reviews on a large number of businesses, including credit repair agencies as a result. They also provide guides on how to get yourself back on track when it comes to credit but they do not offer the kind of in-depth expert advice that many people need.
Taking the first steps to better credit
If you’ve read to the bottom of this guide, the next step is to take action. For some, it will mean doing it themselves, for most, however, it will mean trying out one of the credit repair agencies discussed above.
Not only will these agencies do the work for you, they also have a much higher success rate because that they are credit professionals. Better still, many of them let you get a taste of what they can do for free, and almost all of them will offer some form of a money-back guarantee if you do commit to the monthly fee.
So, what are you waiting for? Take the first steps to financing your dream home or dream car by repairing your credit today.
