Repairing credit and Improving credit scores are the two sides of the same coin. Credit repairing is important to improve your credit scores by disputing errors or inaccuracies in your credit history. Is this sounding confusing to you? Well, let me clear your confusion.
What is a Credit Score?
A credit score is a three digit number ranging between 300 to 850 and it represents an individual credit holder’s credit history. Usually by analyzing credit scores of the borrowers, lenders determine the interest rate and credit limits for the borrowers. A higher credit score generally helps people to get loans with lower interest rates and beneficial offers from the lenders.
What is a Credit Repair Process?
Credit repair is a process through which an individual can improve his/her credit score from low to high. So, to improve your credit score, you need to know how to do credit repair. But, before starting the process, you must know-
What are the Reasons for Low Credit Scores?
Credit score calculation depends on several factors. Here are the most common reasons for low credit scores-
● Late or Missed Payments: Even one missed payment can be the cause of your low credit score.
● High Credit Utilization: Using too much of your available credit negatively affects your credit scores and lowers it.
● Many Hard Inquiries: Your scores can be decreased gradually if you apply for multiple credit cards or loans in a short period of time.
● Errors in Credit Reports: Errors such as wrong information, accounts that don’t belong to you, wrong addresses etc. can drag down your credit scores.
What Steps Should Be Followed in the Credit Repair Process?
Step 1: Checking Reports
You need to check your credit reports for finding errors as your first step. You can get a free report from Annual CreditReport.com (Official Source) Check for:
● Incorrect address, personal details, duplicate accounts, late payment etc. If you find inaccuracies or errors, dispute them as early as possible. You can dispute them by taking help from credit bureaus. Three reliable credit bureaus are-
● Equifax
● Experian
Step 2: Pay Off Due Payments:
If you find you have past due payments, take actions fastly to settle this matter. In terms of a big amount, contact your creditors to set up a payment plan for you. Do you have accounts in collections? Here is a tip for you.
Step 3: Your credit utilization should not be above than 30% of your credit limits.Below
30% to improve your score:
Example: If your credit limit is $5,000, don’t use more than $1,500. To low your credit utilization-
● Pay off credit card balances
● Request a higher credit limit (but don’t increase spending)
● Make multiple small payments throughout the month
Step 4: Avoid New Hard Inquiries:
Whenever you apply for a new loan or credit card, it creates a hard inquiry and lowers your score.
● Don’t apply for multiple credit cards in a short period of time
● Stop taking unnecessary loans unless absolutely needed. Tip: Check your report. If you’re pre-qualified, you don’t need to apply multiple time (This doesn’t affect your score).
Step 5: Build Positive Credit History:
Negative marks or credit history close the chances of getting beneficial offers from the lenders.So, to build a positive credit history, you can-
● Deposit money upfront and use the card responsibly.
● Ask a trusted family member to add you to their credit card for becoming an authorized credit user.
● Take small loans which are considered as credit builder loans to improve credit scores.
● Make small transactions and try to pay on time to get positive remarks.
Step 6: Set Up Automatic Payments:
If you don’t want to get negative marks and a low credit scores, avoid late payments by-
● Setting up autopay for your credit card and loan payments.
● Using payment reminders to never miss a due date.
[Note: 35% of credit scores belong to payment history. So, pay on time to get good]
What are the Best Practices to Maintain a Good Credit Score?
Maintenance is more hard than obtaining things. Once you repair your credit, follow these best practices to keep your score high:
Check your reports for errors regularly
● Always keep Credit Utilization Below 30%
● Pay Bills on Time
● Try to use a combination of credit cards, loans, and retail accounts
● Keep old accounts open. The length of the credit history affects credit score
How Long Does It Take to Repair Credit?
The time it takes to improve your credit score depends on your financial situation. Here’s an regular estimate:
● 30-60 days for fixing minor errors
● 6-12 months for recovering from late payments
● 3-6 months for paying off debt & reducing utilization
● 1-7 years for rebuilding from collections or bankruptcy
[Note: Negative impacts stay on credit reports for 7 years. But It can be reduced by practicing good credit habits]