Building a new credit profile is easy. Fixing an ugly one, not so much.
Yet, many Americans are getting better at building credit. Even bankruptcy filers from the Great Recession are making credit rebuild progress. That’s because, there’s no “secret methods” for repairing your credit. Forget about what people tell you, because following the theorized methods of others will do more harm than good.
Don’t believe it?
Here are seven credit repair methods that can do more harm than good!
1. Repairing Credit Through a Professional Repair Service
It’s silly to think, but using a credit repair service might do more harm than good. The best “service” one can get for credit reparation is a consolidation loan. Letting someone else manage your credit report isn’t the best choice. There is a lot of room for error, whether intentional or not.
Here’s an example…
Credit repair companies use the “dispute” feature a lot. This process is necessary to remove any errors on your credit report. But, a credit repair service might push the envelope too far. Some disputes might be overstretching, and will result in a negative or neutral response. Even worse, it’s possible to have great entries on your credit report that will go away. You don’t want to try and score a 2-point correction, if overlooking an error causes you to lose 10 points.
You can repair your credit…without the help of anyone else. These “credit repair gurus” learn from somewhere, and the Internet is full of information. Don’t ever lose hope of your ability to repair your own credit, because that’s when you give up control.
That’s not the only issue…
Credit repair companies are as conniving as bill collectors. You just don’t feel as much pressure, as the confrontation goes towards your creditors. This is cool, having a “bull” on your side is like having the highest-paid lawyer in New York. You let these people represent you, but that can have both good and bad results.
Credit repair companies can help, but almost everything these businesses offer is something you can do on your own. It’s also something that’s best done by someone who has a deep level of knowledge on the borrower. You can give the credit repair agency your financial information, but that only helps so much. You know your situation better than anyone else.
Remember, you can’t change the fact that you went bankrupt, and you can’t erase accurate reports that show you owe money. Yet, it’s possible to negotiate with bill collectors to pay off the debt at a lower rate. If your accounts are in collections, you should be working with the collection’s agency to strike a deal. Sometimes you can pay it in full and get a pay-for-delete, otherwise you can often pay it off for less than what you owe. In any event, never work a recurring payment schedule on a bad debt, as this keeps the negative on your report for longer.
When you use a credit repair service, you are cutting all ties to your creditors. Your representative is now in charge of how to handle debt repayment negotiations. This leaves you feeling powerless. And, it lets the credit repair specialist have control over the situation. The business might lose a little off making errors, but these specialists don’t have as much at stake as you. Make sure to be cautious when you hire someone to help with rebuilding your credit. Even better, save yourself the worries and do it on your own!
2. Paying Off Your Student Loan Early
Credit cards fall under the “revolving debt” category, which weighs towards around 30% of your FICO score. But, student loans are a type of installment debt. The credit bureaus reporting to FICO have a different approach towards valuing this type of debt.
Student loans are an important debt to pay off. Yet, your student loan won’t have a significant impact on your credit score. The biggest change will come if you default on the loan, which is obviously not a good idea. You can go for deferment or forbearance options from your lender. This might save you from defaulting, if in a serious financial situation.
You will not make any big improvements on your credit score by paying your student loan off early. Your financial power should go towards other debts, especially those with high utilization rates. This will do more for improving your credit score, both in the short and long term. FICO factors your credit rating with information from your student loan debt for seven years. When this time passes, it will be clear from your report.
The same is true for other types of installment debt. Credit bureaus rank information and keep it on your credit report for seven years. You cannot control the fact that the good and bad of a paid-off debt is there. The negative, and positive, score factors will both come into play when FICO calculates your score.
This means you might see a significant credit score change once an old account drops, whether for better or worse. But, paying any type of installment loan off early will do little more than let you get through the seven years quicker. So, you should only try to pay off your student loan or any other installment debt if you have a lot of red marks on the account.
3. Creating a Credit Profile with No Credit Line Diversity
Many hop on board the credit rebuild train with no destination beyond credit cards. This is a big mistake to make, because as much as 10% of your FICO score factors from credit diversity. It’s important to show the credit bureaus that your credit portfolio has varying types of debt.
This can be difficult when rebuilding your credit, especially if you are doing so after a bankruptcy. Yet, there are many avenues you can approach to help diversify your credit accounts. For example, if you plan to go to school in the soon future, a student loan will be a big boost to your credit diversity.
To best diversify, you must know the types of credit that exist.
Secured: When you back a debt with assets or cash, it’s a “secured” credit line. This is often done with car loans, home equity loans, and second mortgages. FICO values secured credit lines, but these are most valuable as one-off score increases. Once you establish a borrowing profile, it should be easy to take on a secured line of credit at times. Plus, it’s more affordable to borrow this way, than with most other borrowing options.
Unsecured: When you don’t back a debt with assets or cash, it’s an “unsecured” credit line. This is often done with credit cards, medical expenses, and utility bills. FICO values unsecured credit lines, as these are repaid out of goodwill. The borrower doesn’t put up any collateral on the loan. FICO views a repayment on an unsecured debt higher than a secured loan repayment. But, negligence on either can have negative effects.
Revolving: When you have full access to a credit account under a fixed credit limit, it’s a “revolving” credit line. The most common types of revolving credit include credit cards and home equity line of credit (HELOC) loans. The revolving credit line remains active for as long as the borrow keeps up on the minimum monthly payments.
Installment: When you have a fixed borrowing amount, and a time limit to repay, it’s an “installment” credit line. The most common types of installment credit include auto, home, and school loans.
Your goal is to have a mixture of both revolving and installment credit accounts. You can also rely on both secured and unsecured credit lines. But, the biggest benefit comes from keeping a combination of revolving and installment credit. Keep in mind, your FICO score depends on how much of a gamble you appear for creditors. Physical items from installment loans look great on your credit report, and help to build your credit rating.
4. Disputing Inaccuracies on Your Credit Report
As mentioned earlier, it’s not always easy to request the deletion of an item on your credit report. You need to have justifiable reasoning to make the credit bureaus believe the entry is inaccurate. If you fight accurate entries over and over again, it will eventually have negative effects on your credit profile.
The credit bureau you post the dispute with will investigate your dispute request. It usually takes no more than 30 days to get a response. You can also include a photocopy of your credit report, and then circle around the questionable entries. If ever disputing, also make sure to keep a copy of all communications and documents.
Here’s what you need in your correction or deletion request:
- You must specify the item you wish to dispute.
- You must include any facts and explanations to justify the dispute.
- You need to specify whether the request is for deletion or correction.
Next, you need to contact the creditor that made the error. You will notify the creditor of your belief in the inaccuracy of the report entry. You will also explain that you chose to escalate the situation, by making a dispute on the error. You can include the documentation when mailing the creditor. This will further support your side of the dispute.
Mailing the documents to the creditor also saves you from a disaster. By doing so, the creditor must include your dispute notice in any future entries, until there’s a sound resolve. Make sure you mention to the creditor that you want copied in for any correspondence with the credit bureau. This should kick in within one to three months from when you mail the creditor.
It’s a simple process. The hard part is proving your point. This means it’s only worth fighting if you know it will benefit your FICO score. Challenging a debt that reports with a few dollars of inaccuracy in the amount owing is pointless. Of course, the most important part isn’t the error correction, but whether you need an error deletion. This is when things get serious, and you need to be careful with how you approach the process.
5. Making One-Off Debt Payments and Expecting Greatness
If you are trying build your credit, you want your credit accounts to be active. You don’t want to stall until you have the money to pay it all off. Yet, this is a catch 22 situation when attempting to rebuild credit.
Here’s the issue…
It’s good to get a bad debt paid in a short time frame. Yet, it’s bad to pay it off in recurring payments. This posts a new bad mark on your credit report, every time you make a payment. It’s best to negotiate for repayments on any bad debts in a lump sum. If you can, get a consolidation loan and cover all your bad debts with a good debt.
If you aren’t paying on bad debts, and all credit accounts are in good standing, then you want to be active with those accounts. These are the ones that report new positives every time a payment posts. This is where you want the bulk of your credit entries to come from, as it can make any credit report look good. The one or two bad debts end up far back in the list, but you will need to fix this at some point as it will continue to affect your score.
Here’s the catch 44!
In a double twist, it might make sense for you to leave a bad debt to fall off your report. It takes seven years for it to go away, supposing it’s not a bankruptcy or foreclosure. So, keeping an account unpaid for six years leaves you in an interesting position. You can wait it out an extra year and let the negative remove from your report, and your score. Yet, you could pay the debt in full and put a “good over the bad” – this won’t help nearly as much!
It’s almost always necessary to pay on your credit debts. This is the premise of credit score calculation, and there are few loopholes left to use. Yet, the way in which you repay any amounts owing can have a significant impact on your score changes. Keep that in mind when working on any debt settlement agreements with creditors.
Be Mistake-Free, Debt-Free, and Credit Rich!
You don’t have to pay a credit repair specialist hundreds (or thousands) to make your debt problems go away. There’s no better solution than making the effort yourself. It’s only a matter of learning what to do, and what to avoid. Seeing as the Internet is full of information, you have no excuses!
Take the time to figure out the effects of any debt repayment or credit recovery attempt. It’s important to know the good and bad each move poses on your FICO score. It’s also important for you to be cautious about what you dispute from your credit report. Either way, all the right processes are possible as long as you take the time to learn.