Credit repair is the process of fixing a poor credit report.
What is credit repair?
Credit repair is the act of fixing a poor credit profile. This includes addressing errors on your credit report, recovering from identify theft, or simply establishing better financial habits, such as proper budgeting, debt repayment, and paying your bills on time.
Credit repair is not about your credit score. Instead, it is addressing the information on your credit report, which is the basis of your credit score.
Most people can do credit repair on their own. Alternatively, there is also the option to enlist the help from a credit repair service for a fee. These organizations are regulated by the Credit Repair Organizations Act (CROA). It is important to note that these businesses do not have any special privileges to dispute your information on your credit report, but merely provide a service to dispute mistakes on your behalf.
How does credit repair work?
Mistakes on Your Credit ReportLegitimate errors on your credit report, ranging from errors in reporting from lenders to blunders in your personal information can affect your credit. You will need to request your credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion.
Next, identify what areas you think are inaccurate. You can then contact these credit reporting agencies and dispute the information. This can be done by phone, in writing, or online. You may consider submitting copies of any supporting documents to support your claims.
Credit reporting companies must investigate your claims within 30 days. Furthermore, they are legally obligated to remove incorrect information. When the investigation is complete, the credit agency must give you the results in writing.
Improving Your CreditWhether you have been a victim of identity theft or only need to build up your credit, there are a few things you can do to repair your credit. Your credit score is derived from five main factors: payment history, amount of debt, the average age of your credit accounts, type of credit accounts, and recent applications of new credit accounts.
Payment HistoryYour payment history influences 35% of your credit score. Your first goal is to address accounts that are past due or delinquent. Then, you can pay off accounts that are already “charged-off” or more than 180 days past due. Finally, take care of any accounts that have been sent to a collection agency.
Once all your accounts are paid and current, always pay your bills on time and ideally in full. This is a sure-fire way to build up your credit again.
Amount of DebtThe higher your balances are on your credit cards, the higher your credit utilization. This ratio measures how much debt you have against your total credit limit. The goal should be to bring your credit utilization to less than 30%. There is little you can do besides paying off your debt and using your credit cards less.
Average Age of Credit CardsDon’t close your credit card accounts. The longer the average age of your credit cards is, the better your credit score. You want open and active accounts with positive payment history.
Type of Credit Accounts and Recent Applications of CreditYour credit mix, or the kind of credit accounts you have, determine 10% of your FICO score. It’s usually advised to have a variety of credit accounts. However, while doing credit repair, you should not apply for any new lines of credit or try to diversify your profile right now.
Applications of credit temporarily lower your credit score. Additionally, any approved new line of credit will reduce the average age of your credit accounts.