When trying to improve your credit, separating fact from fiction can prove difficult. Many credit repair companies claim in TV and radio commercials that they have the secrets to cleaning up credit, but is there really a magic fix for credit repair? The truth is that consumers do not have a right to force the removal of negative information from a credit report if it is true and made within the time limitations for reporting. While legitimate steps can and should be taken to improve one’s credit, unscrupulous credit repair companies suggesting you dispute accurate credit history or encouraging you to give misleading information on a loan application should be avoided.
The good news is that consumers can follow simple steps to rebuild their credit without having to pay for the assistance of a purported professional. With all the scams and misinformation on the web and in the airwaves, D.I.Y. is often the best policy for credit repair.
Understand Your Credit Report
Before you embark on efforts to improve your credit, you should first take the time to check the status of your current credit report. Copies of your credit report may be obtained instantly and without charge online from www.annualcreditreport.com once per year. After obtaining a copy of your report, review it for any mistakes or incorrect information. Take the time to follow the dispute procedures included with the report to alert the credit reporting agency of any errors on your report and be sure to follow up to ensure errors are removed in a timely manner.
Reduce Your Debt Load
The most difficult part of improving your credit is the most obvious – eliminating the balances you may be carrying on revolving debt. Focus your largest debt reduction payments on the credit cards with the highest interest rates while still maintaining regular, timely minimum payments on your other cards and loans.
If you are like many consumers, your credit card balances likely increased because you were spending more money than your income permitted. To reverse the trend of growing debt, you may have to consider significant lifestyle changes, and this part of the process may require real sacrifice. Significant but simple changes might include committing to eating out less often or dropping a premium cable package. If your expenses are already stripped down, you may need to increase your income through a second job, a small part-time business or even yard sales.
Bankruptcy may also be an option if your debt is beyond management. While bankruptcy is a negative mark on your credit, its impact must be balanced against other factors that can significantly drag your credit score down even more, such as judgments, repossessions and an overwhelming debt to income ratio. Although the bankruptcy will be noted on the credit report, the debts discharged will show a zero balance.
Start Building Positive Credit History
Once your debt is under control, you need a strategy for building a positive credit history. While the most important aspect of improving your credit score is ensuring that you maintain timely payments to your creditors, the following specific steps will also help to boost your credit.
1. Obtain an installment loan. Remember that the credit reporting agencies care less about how much you borrow and more about how well you perform. Therefore, focus on getting a small installment loan, perhaps even just $1000. Be sure that the loan is from a bank or credit union that will report your loan to the credit reporting agencies. You want your good payment history to be known!
2. Maintain approximately two to three credit cards. Be sure to keep your balances on each card below 30% of the available credit. As with the installment loans, it matters less how much available credit you have and more that you keep the balances consistently low.
3. Do not max out your credit cards, even if you pay them off each month. Ideally the credit reporting agencies will see that you are keeping your average balances low. While paying off your credit card in full each month is generally a good idea, you may find that your credit is not improving like you might expect if you are maxing out your credit limits every month because your credit cards may be reporting your balances to the credit bureaus in the middle of your billing cycle when the balances are high. To the credit bureaus, your cards may appear to be maxed out all of the time even though you are paying them off each month.
4. Consider a secured credit card. Find a bank or credit union that issues secured credit cards, which are typically given to applicants with damaged credit because the consumer is required to keep on deposit some amount of savings as collateral that will secure the available credit under the card.
5. Build relationships with your banker. The best place to obtain credit
is often at the bank or credit union where you maintain your accounts. Take the time to get to know your local banker. He or she can give you insight into the loan products they have and which will best help you improve your credit.
The importance of maintaining good credit is often unrealized until you are turned down for a loan. While it is never too late to start improving your credit, taking the time to understand and manage your credit now may save you the frustration and delay of having to rebuild credit later.
