How to fix your credit:
This post is based on something I have a lot of experience with. My day job is working at a financial institution. I pull credit on people every day and help them review their reports and provide them with tips and tricks to improve their score and odds of obtaining financing.
If your credit isn’t so great, you’re not alone. A purely unscientific guess is that on average most scores I see every day are well below 640.
If you lack credit experience, meaning you don’t have any credit at all – you’re better off than someone with a ton of issues.
If your credit is damaged, you may need an expert to help you repair your credit (ie – a bankruptcy attorney). Credit can always be fixed, but sometimes, it’s not easy.
If you just have a few small collections, it may be best to just pay them. If they are beyond your means to repay, you should talk to an attorney and figure out the best way to resolve them. Determining if the collection items are valid is ultimately a legal question, so determining whether or not something should be paid or should have fallen off your report depends on what you agreed to with your creditor in the original contract – which is why an attorney who can offer qualified legal advice is recommended.
The steps for fixing your credit are as follows:
- Determine where your credit currently sits
- Determine which factors are affecting your score
- Develop a plan to correct those factors which may include establishing more credit, paying off old charged off accounts, getting in touch with government agencies that have attached things to your credit report, contacting a bankruptcy attorney etc.
Some things to keep in mind about credit reports and scores:
- Everything that can be known about credit reports and scores (I.E. not a trade secret) is available on the websites for the three major credit reporting agencies: Transunion, Equifax, and Experian.
- Each credit reporting agency uses a variation of the FICO formula
- Each agency has about a dozen different scores, which can differ significantly – even among the same agency. For example, Transunion has a score called the Classic 08 and another one called the Classic 08 – Auto; each of these scores is used for a different purpose. This benefits lenders who can choose the best model for whatever loan they’re offering. There are 40+ slightly different versions of your score.
- As stated above, all of those versions are based on the FICO formula, so they’re all based on the same factors.
- The following are factors of your score: Payment history, Amounts Owed, Length of Credit History, New Credit, Types of Credit Used.
- Cellphone and utility bills, paying rent, etc. do not help build your credit, even though you often have to go through a credit check to obtain these services. However, they can hurt your credit if you fail to pay your bills on time and the company sends you to collections.
- Items that can hurt your score are collection items, judgements, medical bills, bouncing checks, bankruptcy, foreclosures, using too much of your available credit, paying late (30 days or more), government liens, past due medical bills, too many credit inquiries, not enough length of credit history.
- If you are aware of the behaviors that build good credit, then you can practice them and make sure your score stays high.
- On every credit report the agency lists 4 factors that are contributing to your score.
Why Good Credit Is Important to Any Entrepreneur:
Credit is the lifeblood of business. If you don’t have $10,000 to float inventory, then using credit to do this is an option for people with good credit. Managing cash flow shortages with credit can help you keep your business afloat when there are delays in collecting cash or selling inventory. It also beats asking your friends and family for start up money.
Tools You Can Use To Track and Improve Credit:
Where to start:
I personally recommend reviewing the basic ins and outs of how credit works, which is available online through each of the companies on their website or at myfico.com. I usually send people to Transunions education center. There are a few short articles on each topic that cover building and improving credit. I’ve done all the googlign for you and linked the learning centers for each bureau here: Transunion, Experian, and Equifax.You can also check out myfico which is the consumer side of Fair Isaac and Company.
The credit reporting agencies are required by law to allow access to your reports (not your score) at least 1x per year. This is easily done by visiting the official website: annualcreditreport.com. With annualcreditreport.com you can check your report from each company and see which accounts are open, if you have any collections or deliquent accounts. They also provide you with a nifty report so you can see what is good and what is bad about your credit history, as well as provide you with easy ways to dispute items on your report.
How to dispute items on your Credit Report: Understanding the Process of Disputes
Find something you didn’t do on your credit report? Mistakes can happen, and that’s why the credit reporting agencies allow you to dispute things. If you go to each website for the agencies (Transunion, Experian, and Equifax) they have sections on their website that allow you to fill out a form explaining your dispute. The agency will contact the company that placed the record and verify its legitimacy.
Keep in mind, the purpose of any consumer report is to accurately provide information to users of the report. Therefore the bureaus have processes in place to prevent erroneous information from going onto or being removed from your report. Of course, accidents happen, and things fall through the cracks. Some people start by sending letters and disputing everything on the report that’s hurting their score. If the information is valid, it is likely staying on your report. For more information see this article on lifehacker.
The article linked above contains contact information for each bureau and how the process works.
How to get your credit score for free: Credit Karma
So now that you know what’s on your report, how do you find out your score? Sure you could pay for it – and I could try to link you to the transunion website so I could collect affiliate money – but the truth is there is a fast and free way that doesn’t require a monthly bill.
I recommend Credit Karma. I use it myself and have been able to increase my score by about 100 points in the last year. Credit Karma is a marketer for credit card companies, and they earn money every time you apply for a credit card through them. They’re sort of like the match.com of consumer finance. They use the information in your credit report to match you up with different credit products designed for people with a similar credit profile.If you don’t want them to get paid, don’t apply for any cards.
The best part is their iphone and android apps, which make monitoring your credit on the go a breeze.
The Credit Report Card
What Credit Karma offer you to get you in, is a free credit report card. The credit report card analyzes your credit report and breaks it down into easily understood chunks of data. It tells you which factors are good, and which factors need work.
As an example, years ago – I had a number of late payments. I wasn’t able to do anything about them other than to wait for them to go away. My score recovered from the low sixes over a period of time but I noticed a jump up to the low 700s when the lates finally fell off. Credit Karma notified me of the improvement and then told me I had limited credit – which was true – just one card and my mortgage. I applied for a card at a bank, earned about $300 by getting the cash back bonus and taking advantage of the 5% spending category, and then earned about $200 in rewards over the year from using that card to pay for my new business idea and putting almost every dollar of bills I pay on it. My score jumped up into the mid 700s after 3 months – so I applied for a 10,000 line of credit with a local credit union and was approved. They then offered me another 9,000 credit card, which I accepted. I applied at another credit union for 5,000 more and then applied for a card with a bank – they gave me 2,000. Then my existing two cards upped my limit by another 2500.00. This gave me a flood of access to cash to use to finance my business – but not needing them right now, I simply put them in my desk drawer.
Of course this impacted my score because I have had a number of inquiries on my reports and because opening up 5 lines of new credit lowers the average age of my accounts. It improved my score because my credit utilization went down. Not sure what this means? Read the articles on Transunions website.
Another cool thing about Credit Karma? Any time I get a new inquiry on my report, Credit Karma notifies me on my next update which gives me the opportunity to make sure nobody else is using my good credit to finance their own business.
Ways to establish credit:
Now that you know what is on your report, what your score is, what you need to do to improve it, now we’ll discuss how to establish credit.
If you don’t have any credit:
Get started with a local credit union and see if they offer any credit building programs or secured credit cards. If you don’t have a local credit union, visit a community bank. If none of these options work, your last bet should be an evil big bank. Just beware of their fees and payment policies and do your best to abide by the rules to avoid late payments.
You can also visit a department store and see about getting a card with them. A note of caution is that too many store cards can hurt your credit report. They also often times have incredibly high interest rates. Get one with a store that you can use often and pay easily online or at the register. I have a Macy’s card and I also would consider a company like Target. The strategy for these cards is to use them once or twice a year and pay them in full before the month ends.
If you already have credit:
Use the recommendations from Credit Karma or use a tool like NerdWallet to help you pick the best card based on your credit profile. There are cards for people of every stage of rebuilding.
Another option is to consider a secured loan, which often times requires a lower credit score. For instance, asking your credit union for a cash out loan against a car that’s free and clear, or against a certificate of deposit or savings account can also help improve your score.
Credit In a Nutshell:
Good credit is essential to maintain. No matter what you’ve done to it, there are ways to fix it. Everything you need to know about credit is easily attainable online, and isn’t complicated to understand. Using tools from Annual Credit Report, Myfico, Transunion, Experian, Equifax, and Credit Karma you can determine which steps you need to take to fix your credit.