Credit repair is a confusing issue for some consumers. If you don’t consider fixing your credit before a major loan application, you may learn the hard way about one of the most important steps in the credit approval process: checking your credit report before applying.
Lenders offer more competitive interest rates and lower down payments to those who have the right credit scores.
Are you ready to apply for a major line of credit? If you do so without examining your credit report, you may be cheating yourself out of a lower interest rate. You can even miss out on a lower down payment if you don’t take steps ahead of time to fix your credit.
Credit Repair is Simple But Takes Time
The Consumer Financial Protection Bureau (CFPB) is the official government watchdog agency dedicated to informing consumers about their rights and responsibilities about credit. On the CFPB page, explaining how credit scores work, the agency lists a set of factors that help decide your FICO score.
At the very top of that list? Your record of on-time payments and the amount of unpaid debt. Consider what Transunion (one of the “big three” credit agencies) says about on-time payments.
“Your payment history makes up 35% of your score, while the amount you owe lenders represents 30%. The length of your credit history contributes 15%, and the types of credit accounts you maintain comprise 10%.”
Remember, that’s straight from the credit reporting agency’s official site, and those are numbers to take seriously.
If you apply for a major line of credit such as a mortgage loan or an auto loan and don’t have a full 12 months of on-time payments on all financial responsibilities on your record, you not only have a lower credit score, you also risk being turned down for a loan. Your payment history will not indicate to the lender that you are a good risk.
How to Repair Your Credit
The phrase “credit repair” is a bit misleading. We are really discussing credit rehabilitation. That’s a phrase you will find on credit reporting agencies’ websites. It’s sometimes referred to as the preferred term. However, no matter what you call it, the following steps will help you raise FICO scores over time:
- Pay On Time, Every Single Time. The first step toward a higher credit score is making sure you make all payments on time. But don’t expect this to change your FICO scores overnight. You will need to establish a record of on-time payments over time to show a potential lender you have good credit habits.
- Reduce Your Credit Card Balances. Work toward account balances less than halfway to the credit limit. 30 percent is ideal. Avoid carrying balances close to your credit limit. Doing so consistently is a red flag to your lender.
- Avoid Opening New Lines Of Credit And Avoid Closing Old Accounts. The age of your credit accounts will be an important factor. It’s never a good idea to open new credit accounts ahead of a major credit need such as a home or motor vehicle.
Do Not Waste Money On Credit Repair Services
The consumer can do many aspects of credit repair. Set up automatic payments to ensure your bills are paid on time. Create a budget and a payment plan. Reduce the outstanding balance on your credit cards.
However, what you CANNOT do is remove or pay a third party to attempt to remove ACCURATE credit reporting data from your credit report. The Consumer Financial Protection Bureau official site reminds consumers that credit scams include any company offering to get rid of accurate negative credit information.
“No one can do this,” the official site says.
Accurate data stays on your credit report between seven and 10 years after it appears. Lenders may be more forgiving with negative credit reporting data if it is two years old or more. But much depends on your patterns of credit use after the incident.
Lender standards and state law may also be factors in what’s possible in such cases.
However, one thing that often does not come up as part of these conversations is something called tradelines. A tradeline is the credit card industry’s term for an entry in an individuals credit score.
How tradelines work is you basically get yourself added to someones credit profile who has a better credit score than you. Its a decent short term fix. But if you have income trouble or you can’t pay your debts, even buying a tradeline won’t work for you. If this is the case, you’ll have to improve your credit the old fashioned way. Pay your debts on time and keep your credit card utilization low.
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Joe Wallace specializes in personal finance, military affairs, and consumer protection topics. Since 1995, his work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and collects unusual vinyl records, which gives him an excuse to write the vinyl blog Turntabling.net.