How to Repair a Damaged Credit Score
February 23, 2011
With the rising number of foreclosures, short sales, late payments and personal bankruptcies, it's no surprise there has been an increase in the amount of people with damaged credit. Unfortunately the scores generated by the credit bureaus do not differentiate between borrowers who chronically have trouble with money and those that are temporarily struggling.
Credit Repair - Step One:
Get a copy of your credit report. Here are the top ways to get a copy of your report:
If youv'e been turned down by a lender, ask them for a copy of your report. They are technically not supposed to share your own report with you, they can advise you of your credit score and the reasons for you were declined but they are not supposed to give you a complete copy of the report. That said, it doesn't hurt to ask and you will usually get a copy from the lender - they want you to improve the score so you'll do business with them in the future.
The only truly free way to obtain your credit report online is through the website: www.annualcreditreport.com. You can get one free copy per year. The report is available online so this is a good place to start.
A site we really like for online credit reports is www.freescore360.com. It has a free 5 day trial and after that you'll pay $29 for online access to your score and for credit monitoring. The coolest part about using this service is that you can dispute negative credit issues right online. With most other credit reports, online or offline, once you find a mistake on your report you'll have to make a written request to have it removed from your creditor. This can take weeks and has a good chance of geting lost in the shuffle. You can also make offers to pay down your balance on credit cards or request a lower interest rate, all online with the click of a mouse.
Last but not least, MyFico.com offers one time copies of your credit report. Many times the scores you receive are usually not the “real” credit score used by lenders, but an approximation based on a separate formula. These imitation scores can vary by 100 points from the FICO score used by about roughly 8 out of 10 lenders. That means their real value is suspect.
Most lenders base their lending decisions on Equifax, Experian, and Trans Union bureaus' reports and FICO scores. FICO scores are the primary measure most frequently used to determine creditworthiness. The formula for the information that is used to generate the FICO score was created by Fair Issac Corporation in the 1960s and has been in wide use for decades. The FICO scale runs from 300 points to 850 points; the higher the score, the better your credit standing.
scoring expert John Ulzheimer, a short sale or foreclosure can turn a FICO 790 into a FICO 590 overnight. Pay multiple bills late and you can expect to lose anywhere from 80 to 150 points from your FICO score.
Each of the major credit bureaus generate their own FICO scores based on the data they collect. So it's important to you get a copy of your credit report from each of the credit reporting bureaus to assess your credit damage.
The first step in rehabilitating your credit is to consistently pay your bills on time and not do any more harm. Work to clean up the credit report one black mark at a time by disputing inaccuracies and paying off past-due balances. If the credit reporting bureaus cannot verify the accuracy of a black mark, they are required to remove it. Not only does it have to be correct, but it has to be verifiable.
Paying off credit cards loans will help give your credit score the most lift. If keeping up with your credit card bills is still an issue, then call the issuer, explain your situation and try to negotiate payments you can afford. If they agreed to work with you make sure you get the terms of your agreement in writing.
One of the factors that the FICO formula considers is the total amount of debt on your credit cards compared with your total available credit, your so-called debt utilization rate. People with FICO credit scores above 760 typically don't have debts that exceed 7 percent of their available credit. If you are at 50 percent and can get the rate down to 30 percent, that will certainly help.
All three major credit bureaus allow you to add a brief statement explaining your hardship, through their Web sites. FICO doesn't consider these statements when formulating scores, but because prospective employers may pull a copy of your credit report, you may want to consider posting a statement.
Obviously having poor credit makes qualifying for a traditional credit card difficult. Used strategically, a secured card can help reestablish good credit.
Your recent payment paterns will have a bigger impact on your credit score, so the sooner your start to pay your bills on time the faster your credit will improve. If you add a secured card and you pay it religiously and the balance is low, it will help your score a lot more quickly than if you do nothing.
A secured credit card can help you nurse your credit back to health more quickly. Secured credit cards require a set amount of money in a bank account, say $250 or $500, as collateral. The amount of available credit is usually equivalent to the amount on deposit. Before deciding your secured card issuer be sure to read all the terms and see if the issuer reports your payment information to the big three credit bureaus.