When life gets tough and your debt starts to pile up, it can be easy to fall behind, which can damage your credit-worthiness. Bad credit can affect various aspects of life, such as obtaining a credit card, checking account, car loan, or even finding gainful employment. Some of the most common causes of bad credit are unemployment and unpaid medical bills. Often, the more your credit is damaged the more difficult it can be to dig your way out, as credit limits get lowered and interest rates get raised. Buying a home with bad credit can seem like an impossible dream. Many have walked this road in the past and many more will walk this road in the future. Knowing how to navigate your way out of this situation can be extremely beneficial.
FICO Score and VantageScore
FICO Score and VantageScore are two of the most common factors lenders evaluate when considering giving a line of credit. Scores can range from 300-850, with the higher score meaning the better the credit worthiness. Payment history is enormously weighted in calculating a credit score. Consistent and timely payments are crucial in achieving and maintaining good credit. Utilization of credit is also very important: too much or too little can both affect you negatively. A guideline is to utilize no more than 30% of each credit line. It is good practice to have a few different lines of credit to be able to keep the balance on them at or below 30%.
How To Replace Damaged Credit
When life events put your credit in the negative, what can be done to repair damage? A good place to start is with a copy of your credit report. There are three nationwide credit reporting bureaus or agencies:
These bureaus must provide a free copy of your report every 12 months when requested.
You can contact these agencies to request a copy by:
- Going online to Annual Credit Report
- Calling 877-322-8228
- Mailing a request to: Annual Credit Report Service, P.O. Box 105281, Atlanta, GA 30348-5281 (request form can be obtained at here.
Avoiding Fraud With Credit Repair
It can be easy to get sidetracked by multiple ads and services offering credit repair. Focus on getting the report from at least one agency, though you are entitled to receive all three. Also, be wary of impostor websites!
Type the web address exactly or click this link at Annual Credit Report
Once you have a copy of your credit report you can review and interpret the data.
There are five major categories:
- Your personal information
- Your monthly accounts
- Your accounts that have been reported as in default
- Public records
Verify that all of the data listed is accurate, and report inaccurate information. Keep in mind that the bureaus report information given to them by creditors, who in turn received this information from you when filling out any applications (hence the importance of always completing applications accurately and legibly). You may find different spellings of your name, address (both present and past), as well as employment. Most items will be on your credit report for seven years, though items such as bankruptcies and tax liens can last up to ten. After reviewing this information, dispute inaccurate or incomplete information. Many people do not realize the power of disputing items in your credit history. Much of credit repair can be done with this step. Know your rights, such as the fact that the bureaus have three days to either reinvestigate the disputed item or it must be deleted. A great resource is The Fair Credit Reporting Act (FCRA) which can be found, among many other great resources at found here.
Credit Repair Is a Process
It can be tempting to try a shortcut and hire a company to do the heavy lifting for you. Be wary! There is nothing these companies do that cannot be done by the individual, and there is usually a fee for this service. Also, there are many scams that pretend to help but are in fact simply trying to steal your information. If proper steps are taken, one can very easily repair their own credit in a fairly short amount of time, at little to no cost. Addressing delinquent accounts is paramount. Many people do not realize that one or two delinquent accounts can be the only thing holding them back from owning their own home. Also, it is important to note that delinquent accounts can be negotiated. Tax refunds, for example, are a great way to rid yourself of old debts. Contact past creditors in delinquency and see if they will negotiate for a discount. An example would be a past balance of $500 that a creditor would happily take $300 (or often less depending on the situation) in a lump sum rather than hoping for years of payments to receive the full amount.
How Credit Repair Works
Understanding how credit works and cleaning up any errors is half the battle to winning your financial freedom. After that it is simply a matter of building up and maintaining those precious scores. Start with one simple line of credit. Low limit, high interest rate credit cards are a good place to start. Instead of using a debit card for your daily life purchases, such as gas and food, use this card. The most important aspect of this technique is making sure you pay off the entire balance at the end of each month. This way you are not even paying any interest. This will establish credit and begin driving up those scores. As your scores go up and you establish history, you will become eligible for lower rates, higher limits and more lines of credit. Continue to keep a few different cards at 30% or less and your scores will continue to rise. The key here is consistency in making your payments on time. Do not live beyond your means and do not be tempted to use your cards to buy frivolous items.
Repairing your credit, building new credit and consistently maintaining your balances will yield positive results. You will find better credit lines, with better terms, possibly better employment and in no time at all you will be the proud owner of your very own home.