How Does Credit Repair and Debt Restoration Work
How Does Credit Repair Work? 2018 Guide to Debt Restoration
May 10, 2014
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Credit Fixes for Your Wallet

Credit Fixes for Your Wallet

If you have bad credit, you probably know that it hurts many aspects of your finances. It can affect your loan, mortgage, and credit card rates. Many utility and insurance companies set their rates and deposits based on credit scores as well.

How can you improve your credit?

Is it something you can tackle by yourself?

Short answer: Yes!

Credit Fixes for Your Wallet

Credit repair companies don’t provide any credit fixes that you can’t do for yourself. The prospect of a credit score repair can seem overwhelming at first, but with small steps and patience, you can effectively raise your score and improve your finances.

Your Personal Finance Tips helps you learn about your financial situation and give you the knowledge you need to raise your credit score.

The key to credit restoration is to make a plan to fix your credit based on your own personal circumstances. If you have a lot of items in collections and that is what is pulling your score down, then you will need to make a budget and a plan to pay off as many of those accounts as you can.

If what is causing your low score is that you don’t have enough credit, you will need to plan out how to get more without dragging your score down. A secured credit card is a great way to increase your credit and boost your score.

It’s also important that you don’t start applying for a variety of different credit cards all at once. Each time you apply, it will ping your existing credit. Choose one or two of the best cards out there and apply for those and those alone. A credit repair service can help you look at all your options and choose the best path forward based on your individual situation.

Where Do I Start?

First, it’s important to know what your credit score is. Start by obtaining your credit report, which we cover more in-depth below. You can do this once a year for free from each company.

If you find your score is really bad, you should consider a credit repair company – but, be sure to do your research, as some credit repair companies are more scrupulous than others and a bit of research on the front end will save headache – and potentially money – in the long run. At Your Personal Finance Tips, we’ve reviewed and compared the best credit repair companies on the market today.

Once you’ve reviewed your reports, you can begin on the path to repairing your credit score. Unfortunately, if you’re repairing your own credit, there’s no way around it; it’s going to take hard work.


Obtaining Your Credit Report

The first step is obtaining a copy of your report from each of the three major bureaus. Transunion, Equifax, and Experian are all credit reporting agencies, but they often contain different information, which can lead to a variation in scores. This happens because some creditors report to one bureau but not the others. Due to potentially differing reports, it is essential to review the information on each bureau.

If you are obtaining your reports before applying for a large loan or a mortgage or even looking at your reports for the first time, lenders recommend that you get all three reports at once to address all possible issues immediately. These reports will not contain your credit score, but they will allow you to look at what factors are affecting your score. Usually, you can receive your score from a credit repair company or credit bureau that will allow you to view your score for free.


Reviewing Your Credit Report

Reviewing the information on your credit report is arguably the most crucial aspect of your credit fix. According to Nerd Wallet, the Federal Trade Commission (FTC) estimates that 5% of consumers have an error in their report that is large enough to impact the rates that they receive on credit. The FTC also reports that 1 out of 4 consumers’ reports have small harmful errors.

These statistics make it worthwhile to review your credit reports carefully. Be sure to check your report for unknown addresses, unknown accounts, incorrect reporting, and unauthorized hard inquiries.


Disputing Incorrect Information

If you happen to find any incorrect entries on your report, you may contact the bureau to dispute the entry. Each bureau has an electronic dispute process, but the recommended method is correspondence via mail. It is essential to keep records of your letters and findings if an in-depth investigation is needed.

If you are submitting electronically, make sure to print or save essential pages and documents. Consumers can file disputes with both the bureau and the lender to speed up the process.

Be aware that the bureau can view too many conflicts as frivolous, and this may cause the dismissal of the investigation. If an error occurs on more than one bureau, be sure to dispute it with each bureau, as they often do not communicate with each other.


Lowering Your Credit Utilization

If you are carrying a balance on existing credit cards, you should pay those balances off or, at least, pay them down. To boost your credit score, the balances on your credit cards should not exceed 30% of your available credit.

Credit Card Utilization can play a big role in improving your credit score. Utilization is the percentage of credit that you use compared to the amount of credit you have. The recommended credit card usage is below 30%, but preferably in the single digits.

An easy way to lower your utilization is to ask your lender for a higher credit limit. A higher credit limit will immediately lower your utilization. If you are on a tight budget, this option may be too tempting, so use caution.  Another way to reduce utilization is to start making larger payments on high-limit cards.

If you can, pay off the lower-limit cards, such as store cards, completely. Taking out a debt consolidation loan may also lower your utilization, as well as potentially saving you money. Often, just creating a stable budget can help spending habits, and locating extra money to put towards credit balances.


Creating a Positive Payment History

Bad payment history can wreak havoc on your credit report because payment history contributes over 30% of a credit score. Of course, delinquencies will fade over time, so it is important to establish a good payment history as soon as you can. Taking care of charge-offs and collections are important, but take care of your current balances first.

Most delinquencies, including charge-offs and collections accounts, will stay on the credit report for seven years. Bankruptcies can stay on the report for ten years.

If payments are a problem, contact your lender to see if they are willing to set up a payment plan. Get any agreements made with your lender in writing.

If just remembering to pay on time is the issue, set payment reminders or set up your account for automatic payments.

Reduce Your Balances

Now that all of your accounts have the word current next to them, it’s time to start reducing your credit balances. Your debt to credit ratio accounts for 30% of your credit score.

If all of your credit cards are maxed out or very near the limit, your credit score will fall. When you start paying down the balances, do not use the cards and charge the balances back up.

Read that sentence again.

When you start paying down the balances, do not use the cards and charge the balances back up.

That will just put you in a vicious cycle, and your credit restoration efforts will be for naught. Unfortunately, we’ve seen it happen time and time again.


Building A New Credit History

If you have a small credit history, it may be helpful to open an account or two in your name to help establish a good payment history. If you are unable to get a traditional credit card in your name, there are still options. The first option is to apply for a secured credit card. This option is nice because it requires a security deposit as collateral, which is often the spending limit.

Another option is to apply for a credit-builder loan. This kind of loan differs from a typical loan because you get the money after the last loan payment. These cards and loans are typically available at local credit unions and banks.

You may also become an authorized user on a credit card or a cosigner on a loan. This options can be potentially damaging if the account holder becomes delinquent, so it is best to find an account holder that you trust.


The Importance of Budgeting

Once you have your credit score, you can create and stick to a budget. If you don’t have a budget, then chances are, you don’t know how much money is coming in and going out of your pocket each month. It sounds like a silly thing to not realize, but very few Americans claim to know exactly where their money has gone at the end of the month.

Creating a budget can be an eye-opening experience as you track your payments and see just how much you’ve spent on coffee or lunch during the month – small purchases, that won’t matter as a one-time payment but add up quickly. The only way to know for sure exactly where you stand is to create a budget. This is not an easy process for many, but it is enlightening and, once complete, gives you a clearer picture of your finances.


Talk to Your Creditors and Lenders

Now that you know how your finances stack up, you should contact your creditors to ask about lowering your interest rates and payments. A good portion of your credit card payments each month go toward interest. If you can change that by lowering your interest rate and cut more into the principle each month, you’ll pay off the debt faster, which in turns raises your credit score that much faster.

Once you’ve reviewed your credit reports, you need to dispute those discrepancies and tackle the overdue accounts. Discrepancies, while time-consuming to rectify, don’t take life-altering plans to fix. Getting current on your payments, however, that’s a different story. You might even want to consider utilizing a credit repair service.


Did you know your payment history accounts for 35% of your credit score? That’s more than any other factor used to determine your credit score. If you’re delinquent on several accounts, that’s going to drag your score down and fast. Get all of your accounts current before you attempt to pay anything off. That’s the language you want to see when you’re doing a credit clean up: current. When all of your accounts say “current,” your credit clean-up process will be well on the way to raising your credit score.

Now What?

To Sum It Up:

  • Get your Data
  • Dispute
  • Tackle and Pay Off

You don’t know how much you have to pay off or what to dispute and tackle until you have your accurate credit reports, a process that a credit repair service can help you navigate. It all starts with that first step.

As you can see, tackling your credit repair isn’t difficult, as long as you tackle it one step at a time. Be sure to check your report regularly, dispute any errors that occur, and keep up with your payments, and your score (and your wallet!) will reap the benefits.

If you’re not certain about taking it on by yourself, consider hiring a good credit repair company. You can find additional information about the top companies in our reviews section.



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