It’s everyone’s favorite topic to avoid - fixing your credit score. There isn’t a one-size-fits-all plan for credit repair, but there are set steps anyone can take to begin repairing their credit. Because when you apply for a mortgage, your credit score makes a big impact on your approval and rate.
There are five main credit categories that directly impact your FICO credit score: Credit card capacity, late payments, collections, incorrect personal data, and variances between the credit bureaus.
Let’s look at each category, how it affects your credit score, and the solutions you have if one of these is negatively impacting your credit.
1. Credit card capacity - make some room!
Credit card capacity affects approximately 30% of your credit score. In order to make sure this 30% is positive, you’d ideally have 100% of your credit cards paid off.
Here is an example of an account that’s using more than 50% of its credit limit, and, as a result, lowering their credit score.
Solution: Pay off your credit cards - and keep credit card accounts open!
Generally speaking, keeping your credit card balances below 30% utilization is best. However, for the sake of improving your score, you’ll want to pay the cards off entirely. As a general note, you should use the card once a month and immediately pay it off in order to keep the card active and reporting to your credit.
Once your cards are paid off, KEEP THEM OPEN! When you close an account, you lower your overall credit capacity and the age of your credit.
2. Late payments - they have to stop.
Payment history affects approximately 35% of your credit score. More often than not, late payments are a result of hardship, autopayments failing, or forgetting about a due date. Here is an example of someone with a 60-day late payment.
Solution: Start making on-time payments and try to dispute any late payments with your creditor.
When there is an incorrect late payment reporting on your credit, the best remedy is to talk directly with your creditor and ask them to remove this from your credit. Failing that, you may also dispute this directly with the credit bureau.
When there is an accurate late payment, there isn’t any quick fix. But instead, we’re brought back to the basics of how to build credit. The credit bureaus weigh the most recent data strongest when considering your creditworthiness or score.
The best way to overcome a series of late payments is to simply adjust course and make sure everything is paid on-time moving forward.
3. Collections - start making payments as soon as possible.
Collections fall into the same category as late payments - “payment history.” This affects 35% of your credit score. But unlike late payments, they can continually damage your credit each month they are reported as a delinquency.
A collection is any type of account where an organization attempted to have you pay an owned dollar amount agreed upon for 90+ days. After that time, the account was sold off to a third party where they attempt to collect the past-due debt. In addition to your original balance, they’ll have likely added processing fees, which will have been added to your balance.
One of the most common types of collections is medical, as shown below. As you’ll see, sometimes they’ll have very specific information about who is attempting to collect, and other times they’ll have hardly any information available.
Collections that go unattended can continue to drag your credit score down for seven to ten years. Additionally, debts that are not paid off may eventually take legal action against you where they can receive a court judgement to garnish your wages.
Solution: Talk with the collection agencies and pay-off your accounts as soon as possible.
When you’re paying off collections, make sure to check with the collection agency as to whether or not they’d be willing to delete it from your credit. Some will, some won’t, but it benefits you more if they’re willing to delete it. With smart budgeting, you’ll be able to work out a plan to pay off collections no matter what their size is.
4. Incorrect personal data - keep an eye out.
Even if you monitor your credit regularly, this can be a tough one to spot.
But unless the variance is egregious, your lender likely won’t make a big fuss about this. So, it could be years of Jane Doe also being known as Janet Doer, Janine Dosen, Janice Hosenstein, and any other name that someone might have thought they heard when entering your data over the years.
Even if your lender doesn’t draw a big red flag about this, having incorrect personal information can harm your credit since it makes it easier for identity theft and incorrect reporting of collections that don’t belong to you.
Solution: Monitor your credit regularly, double-check your personal information, and look for inaccuracies.
When you begin monitoring your credit, make sure you only have the correct information reporting. If you do this, you’re less likely to have to deal with other more serious issues on your credit.
5. Variances between credit bureaus - check for authorized user accounts.
In this example, you’ll notice an authorized user account. This account has been closed, but it is still reporting a balance with two credit bureaus.
Depending on your lender, this may work against you for your monthly debts. Since this is a closed authorized user account, it does not provide any benefit to you.
Additionally, it’s only reporting on Transunion and Equifax. This will be causing a noticeable difference with the credit score for Experian. Accounts such as this can be the cause for enormous credit score differences.
Solution: Have yourself removed from the account and submit a dispute.
You can correct this data as well. Contact the individual who added you as an authorized user and have them remove you from the account with the original creditor and obtain paperwork. With this paperwork, submit a dispute to the credit bureaus who reported this debt and have them remove it.
How do I monitor my credit?
There are a number of free credit report and monitoring services out there such as Credit Karma that eventually will have associated fees. It’s also likely offered to you for free by your bank and preferred credit card. All of these have their own strengths and their own flaws. I’d suggest using these for tracking changes month to month, but not for tracking your exact credit score. These services will help you track the trend of your score - such as if it’s going up or down and what major items have caused changes.
How do I dispute a claim with the credit bureaus?
We’ve talked about disputing/talking to the credit bureaus a few different times. But how do you actually get ahold of them? Here is the contact information for the three bureaus:
- Website: www.experian.com/disputes/main.html
- Phone number: (888) 397-3742
- P.O. Box 9701, Allen, TX 75013
- Website: www.equifax.com/personal/disputes/
- Phone number: (866) 349-5191
- P.O. Box 740256, Atlanta, GA 30374-0256
- Website: dispute.transunion.com
- Phone number: (800) 916-8800
- Address: P.O. Box 2000, Chester, PA 19016
For more information on how to dispute errors on your credit report, head over to the FTC website.
Do you need extra help?
If you’d like additional assistance reviewing your credit or help with your situation, feel free to reach out me individually at email@example.com.
These are the same steps anyone will need to take their credit, but where to start is a very individual process. You’ll need to have a good budget to make sure you don’t fall into the same issues again. Once you’ve done the work to get everything stable, make sure to keep an eye on your credit monthly for any sudden changes so you may be proactive in keeping your credit nice and healthy. Soon enough, you’ll have fixed your credit and be on track to get a preapproval for your new home!