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Rebuilding Your Credit
August 10, 2009
Has your credit score suffered as a result of increased food and fuel prices? Did you miss a payment or go over your credit limit? If you answered yes, you are not alone. The critical question is are you searching for ways to rebuild your credit score and regain your borrowing ability? Rebuilding credit is a long road to travel but, as lenders, employers, insurance agents, etc. are relying on credit reports and scores more heavily to make decisions, it is a necessary road and one worth your efforts in the end.
Know your score and what is on your report
Do you know what is on your credit report? The Fair Credit Reporting Act requires that you be provided with a free copy of your credit report from each of the three consumer reporting companies (Equifax, Experian, and TransUnion). The official Web site to obtain your report is www.annualcreditreport.com. If you do not have access to the Internet, you may obtain instructions to receive your report by calling 1-877-322-8228. This service allows you to receive your credit report only for free. If you desire to know your score, you must pay a fee. By reviewing your credit report often, you can monitor accounts to ensure that agencies and institutions are accurately reporting your information. Guidance for disputing information reported on your credit report will follow. Fair Isaac credit scoring formula and the FICO scoring system looks at several components when calculating your score. The weights vary from person to person but are close to those provided below:
- 35% payment history
- 30% amounts you owe
- 15% length of credit history
- 10% number of new accounts and their proportion to overall credit
What damages credit scores?
There are obvious factors that lower credit scores including payments 30 days or more past due, collections or judgments, bankruptcy, and excessive amounts of debt. Other factors which negatively affect your score include high balance to credit limit ratios. For example, if your credit card limit is $5,000 and you currently have a balance of $4,800, you have a 96% balance to limit ratio for this account. This tells the lender that you are using the majority of the credit available to you. Similarly, opening numerous new accounts within a short period of time creates a negative impact on your score. Credit card companies have recently started reducing credit limit amounts for borrowers whose chances of default are high. If you do not know that your limit has been decreased, you run the risk of overdrawing your limit.
How to improve your score
Keep your accounts current. Making your payments on time is critical. Establish a system to pay bills and debt regularly to avoid late payments. If you are unable to pay the full balance on your credit card, make sure you send at least the minimum amount owed—this will prevent derogatory information being reported to the credit bureaus.
If you have credit cards, manage them responsibly. If you cannot handle the financial management of credit cards, do not have them. For credit cards and other revolving accounts, try to keep the balance to credit limit ratio below 50%. Instead of using one card for all purchases, split purchases between two or three cards to keep the balance down. If you use credit cards or lines of credit, watch the balance to make sure you never exceed the available limit. However, do not open numerous new accounts at once to increase available credit.
Paying off a collection account will not remove it from your credit report. Contact the company after you payoff the collection to inquire about having it removed from your report.
Payoff debt. Don't transfer balances from account to account.
Establish a favorable history with creditors. Satisfactorily handling multiple types of loans—revolving credit which includes credit cards, installment loans such as automobile loans, and real estate mortgages—is critical to building a solid credit score.
Disputing inaccurate information
The Federal Trade Commission (FTC) has established guidelines for reporting credit report inaccuracies to the reporting companies. You must notify the consumer reporting agency in writing about the information you feel is inaccurate. For details and a sample letter on disputing information on your credit report, visit the FTC Web site. If you have additional questions regarding your credit report, contact your loan officer.
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