Credit Repair 101

Credit Repair

If you have ever dreamed of owning a home, buying a new car or sending the kids to college nowadays, you are going to have to have fairly good credit. Having excellent credit (as opposed to fairly good credit) means you'll be able to get a mortgage, car loan or other form of credit with the least amount of trouble at the most favorable interest rate and terms. If you are not there, do not despair for many of the problems that were mentioned before are fixable. The key is doing something about it.

It may take some time to work out all of the credit problems you have. As some credit counselors like to say, the road to credit heaven is paved with obstacles and frustrations. It takes, for example, an average of 23 weeks just to make a correction to your credit report. Here are some things you can do to improve your credit:

1) Take stock of your current credit situation. Start by ordering a credit report from all three of the major credit repositories-TRW, Trans-Union and Equifax. While waiting for them to arrive, budget your expenses by coming up with how much you're spending on fixed living expenses and debt payments.

2) Scrutinize your credit report. It shouldn't take more than two weeks or so to receive your credit report by mail. When it arrives, look it over for errors such as someone else's debt posted to your account. If you are listed as delinquent on several accounts, and you're not, copies of your canceled checks may be accepted as proof that you paid on time. Look for other problems: too many credit inquiries, too much credit, or other inaccurate information. If you have a joint credit account and your partner has a credit problem, it could become your credit problem. If you co-signed a loan, for example, for a friend or relative who has a late payment pattern or has used your name to apply for a line of credit, you could have a real problem on your hands.

3) Fix credit report errors. If you discover inaccuracies or errors in your credit report, write letters to your creditors (send copies to the credit reporting agencies) and enclose documentation that supports your claims. Surveys in California, for example, have found that 62% of the people polled found inaccuracies in their credit reports (in many cases as a result of divorce). Mail the letters certified and once the problem is corrected, obtain a letter from the creditor stating that the reported information was in error and will be corrected. Keep copies of all correspondence made. Once fixed, order new credit reports to see if the creditors are reporting the accurate information.

4) Pay off your debt before you apply for credit. You don't need to be debt-free to get approved for a credit card or a mortgage, but it certainly helps boost the amount lenders will allow you to borrow. Analyze your budget for additional ways to save money then use that cash to pay down your debts faster. Cut out almost all luxuries. That may mean cutting out your second daily newspaper or eliminating your afternoon cappuccino fix. Maybe it means sharing rides or taking public transportation to work instead of driving your car. 

5) Freeze your credit cards. If you fear that once you pay down a credit card you will only charge it back up to its limit, call your creditor and close the account or lower your maximum credit limit. That way, you will still have them to use if necessary but will be less likely to get yourself all the way into debt.

6) Cancel unused cards. If you have too many credit cards on your credit report or have cards you rarely to seldom ever use, cancel the accounts-in writing. A few months later, double-check to make sure the cards have actually been removed from your credit history and have not just been labeled "inactive." This move alone will add points to your credit score.  However it is important to note that you should keep at least three accounts open.  The older the account and the higher the credit limit (assuming you have a low to no balance on the card), the better your credit score.

7) Re-establish an excellent credit history. If you recently discharged a bankruptcy or have little to no credit history (less than three "tradelines" on your credit report with six months or less history), build up your credit history by applying for credit. The easiest and most common means is to apply for a secured credit card. Charge only a few dollars a month (e.g. a gas purchase) and pay it off. Don't allow yourself to get behind or to over-extend your repayment ability for that will only get yourself into trouble again. In addition, don't allow 40 people to inquire on your credit. Remember, each inquiry will lower your credit score and it takes two years for an inquiry to disappear from your credit report.

8) Work with your creditors. If you are carrying too much debt for you to currently pay on time, call your creditors and inform them of your situation. Let them know that intend to pay but currently do not have the means to make the payments. Work out a plan with them to get yourself back on track. If the account has gone to collection, you may be able to negotiate the debt down and have the negative information removed from your credit report. The age of the collection account as well as the amount you owe will have a significant impact on how easy you can negotiate down the debt. It is important to keep in mind that collection agencies typically work on a commission basis and to receive some money is better than none at all. Also, remember to get everything in writing and keep copies of all correspondence between you and the creditor. 

9) Know when to get professional help. If you're finding it difficult to create a workable budget or put together a workout plan with your creditors, consider getting some free or low-cost professional help. The non-profit Consumer Credit Counseling Service offers free or low-cost credit, debt, and budget counseling. Beware of credit repair companies that will charge you whatever arm and leg you have remaining to "clean up" or "erase" a bad credit history. These companies can't do anything more for you than you can do on your own. Don't get suckered in by promises that your credit slate will be wiped clean. The only way you can do that is by declaring bankruptcy, and your bankruptcy will stain your credit history for 10 years (and not too many companies will want to lend you money after that).

The way to fix any credit situation is to work diligently at cleaning up your credit history as much as possible before you apply for credit. The key is having enough discipline not only to do something about the problem but making sure that it doesn't happen again. Pay down your debt and resolve any issues that could stand in the way of your approval for credit. It's best if you (and your spouse) have a minimum of weak links so that you will qualify for the cheapest and most favorable terms and rates.