The most common type of credit score is the FICO® score, or Fair Isaac Corporation score. FICO® scores are created through an analysis of your credit history, including how long you’ve had debt, what type of debt you’ve carried, whether you’ve paid your bills on time, and how much debt you have relative to how much credit lenders have offered you.
FICO® needs information about your borrowing history to determine your score, so some debt isn’t a bad thing. For many of us, however, it’s all too easy to get in over our heads financially. Here are some tips for repairing your own credit score when the number is low as well as maintaining a good credit score.
Maintaining Your Good Credit Score
Maintaining a good credit score requires you to take an active role in your finances. Your FICO® score is affected most strongly by how well you handle the following:
- Current accounts. Keeping up-to-date with all your obligations is a must for a strong FICO® score. Mortgage payments count for more than revolving debt or installment loans.
- Your historical credit record. A strong, consistent record of paying your bills on time allows you to maintain good credit.
Other positive factors include:
- Keeping lower balances on credit cards
- Having the same address for two or more years
Other negative factors include:
- Having too many open accounts
- Keeping high balances on credit cards
- Making multiple applications for credit over a short period of time
- Moving frequently
How Can I Find My Credit Score?
In addition to FICO®, which assigns a number to your credit worthiness, three other companies monitor consumer credit in the United States. These three companies – TransUnion, Experian, and Equifax – are required by law to let consumers access their information. You are legally entitled to a free copy of your credit report each year. You can get your report through www.annualcreditreport.com, a site sponsored by the three major credit reporting agencies. For advice on obtaining and reviewing your credit report, see the Federal Trade Commission (FTC) website.
The three CRAs can be reached via phone or online:
Examining Your Credit Reports
The first thing you need to do to understand or repair your credit is access your credit report. Order a report from each credit reporting agency. Why? Because one may contain an error that affects your credit score. Also, your creditors may not be reporting to all three agencies, so reports may differ.
Once you have your reports in hand, go through them carefully.
- Are there any mistakes?
- Are there cases of mistaken identity?
- Are there open accounts you thought you closed?
- Is there debt on your credit report that you never accrued or loans that you never applied for?
Report any mistakes in writing to the CRA, following the instructions provided with your report. In the event of identify theft, or loans taken out by someone else in your name, report the fraud immediately and make sure you receive confirmation in writing that action has been taken.
In addition to your legal right to a free credit report each year, you have the right to get a report if you’ve had credit denied. According to the FTC, “you’re entitled to a free report if a company takes adverse action against you, such as denying your application for credit, insurance, or employment, and you ask for your report within 60 days of receiving notice of the action.”
Negotiating With Creditors
If your credit reports show legitimate, negative information reported by creditors, then they alone can act to remove the entries. According to the Fair Credit Reporting Act, lenders are not required to remove “accurate derogatory information” from your file “unless the information is outdated … or cannot be verified,” so some compromise will have to be reached in order to have the items cleared.
By contacting your creditors and asking how you can work to have the harmful information removed, you take the first steps toward repairing your credit score. Explain that you are trying to qualify for a mortgage and that the negative information is making it difficult. If you failed to pay a bill, try to negotiate a partial payoff in exchange for removal of any negative information. Take notes on your conversations and always send a follow-up letter to the creditors.
Avoid Temptation, but Establish Credit
Paying down debt is the most powerful way of improving your credit score, so opening new accounts needs to wait until you have a handle on your existing obligations. If you have open accounts but your credit score is lower than you’d like, avoid going for the next offer that shows up in your mailbox. Some offers of credit seem like quick fixes, but even those with low introductory interest rates have the potential to harm your credit score. Too many applications in a short period of time will seriously hurt your long-term eligibility for important, larger loans. If you see an offer that’s truly tempting, research the lender and weigh alternatives before submitting an application. Even something as simple as opening a department store credit account can have a damaging effect on your credit score.
At the same time, consumers need some credit history in order to establish a credit score. “Your credit report is similar to work references on a job resume,” according to Experian. “Having no credit history is like having no job references. There just isn’t anything to base a decision on, so your application may be declined.”
In addition to credit cards, you can use on-time payments for installment loans like car loans to help establish good credit.
Help is Available for Repairing Your Credit Score
The National Foundation for Credit Counseling (NFCC) offers a free tool to help consumers in the U.S. and Puerto Rico assess their debt and income, understand their finances, and learn to improve their credit.
NFCC Member agencies are available all over the nation to counsel those who need help understanding and managing debt. If you don’t fully understand your credit report, your debt, and what you need to do to improve your credit score, contact an NFCC counselor to begin the process of credit repair.
Mistakes and poor financial decisions won’t hound you forever. Negative information cannot be included on a CRA report after seven years, though Chapter 7 bankruptcies will be present on your record for 10 years.
Start repairing your credit score now by making all payments on time, checking your credit report for errors or fraud, maintaining a low debt-to-credit ratio on all open accounts, and negotiating payoffs with all creditors or debt collection agencies with whom you are in arrears. For help, turn to a NFCC-approved credit counselor or talk to a reputable professional near you. If you repay your debt and borrow responsibly, it will just be a matter of time before you’ve established a good credit score and a more promising financial future.