Tips to Repair Your Credit
“Repair your credit now! Just pay me and we’ll take care of it!”
How many times have you seen that in an advertisement? How many times have you actually done it? There’s many ways out there to repair your credit once you get in trouble — most of which can be done yourself if you just have the knowledge.
You have probably heard the term FICO score, or credit score, many times. But what actually is FICO? Originally founded as the Fair Isaac Company, FICO is a data analytics company who created the FICO score, which measures consumer credit risk. Credit bureaus, such as Experian, TransUnion, and Equifax, collect consumer data and each get a FICO score generated based on their data. Not all data is equal or accurate, thus not all credit scores are the same. A FICO score can range from 300 to 850.
According to TransUnion, whom many lenders typically consider the most accurate of the bunch, reports the average score of Americans in Q2 2019 was 703. Above 800 is considered exceptional, 740–799 very good, 670–739 good, 580–669 fair, and below that is poor.
Scores are calculated on payment history, how much debt you owe versus the amount of credit available, length of credit history, recent inquiries, and your credit mix (cards, mortgages, student debt, cars, etc).
Why your FICO matters, along with your debt to income ratios, for example is when you decide you want to purchase a home, possibly for the first time. As a first time home buyer, the FHA will accept as low as a 580 credit score. They do take lower, but require a higher down payment, which is not recommended. You can get a conventional mortgage with a 620. There are also some new lease to own options, if you have at least a 550 (If you have questions about any of this and are looking to buy a home in DFW North Texas area, contact me, as I am a licensed REALTOR® based in Plano. If you aren’t in my area, I can help refer you to a real estate agent elsewhere in the US).
So if you have a poor score, how do you fix it? That is what you came here to read, right? Speaking from past personal experience, here are some helpful tips.
Make sure all of your credit reports are completely accurate! Did you pay off an account that they are reporting you still owe? Did you close something that shows open, or vice versa? Are your former addresses and names correct? There are any number of items that could be inaccurate. And as I mentioned before, not all data is equal or accurate. Your score is based on making sure that data is correct. You are entitled to a free credit report from each of the three major bureaus once every 12 months. The FTC allows you to order it from annualcreditreport.com , which is their only authorized service. Once you have your reports, if you find inaccurate data, visit each of the companies online and they have instructions on how to dispute items. You do not have to pay them, even if they offer paid products.
Look for deals to save money on credit cards. Who has the lowest APR? Who has an option to transfer debt to their card at a lower or even 0% rate for X numbers of months (be careful of transfer fees, but it may still benefit you to do so)? Who does not have any annual fee? Who’s got the best cash back program? If you have a lot of debt, it is in your best interest to pay the least amount of interest possible.
Use the debt snowball approach. If you have multiple cards needing paid off, the best strategy is to start with the card with the smallest balance and pay it off first. But what about the other cards, John? At the very least, pay just above the minimum payments (or more is better). But put the most money you can monthly toward that low balance card. Once you pay it off, then you can take the money you were paying towards that card and start applying it, and more, to the next card, and so on until they are all paid. The payments grow into a growing snowball. You will feel a sense of accomplishment once you pay that first card off and know you’re moving in the right direction.
Always make payments on time. One time late is usually not a big deal. More than that starts affecting your score and your pocket. If you are a good customer, your bank may waive that one time late fee. But they won’t be so kind on subsequent late fees, which are then charged to your balance and accrue more interest.
Always pay more than the minimum payment. You will notice in tip 3, I said pay just above the minimum while working your plan. That is because the minimum payment does very little to pay anything off. It will however keep you from being late. Credit card bills are required to show you how long it takes to pay off your balance paying the minimum. So it should be a stark reminder to you. Paying more than the minimum gets you to your goal faster, and clearly helps you in the future.
Use the debt avalanche approach. Pay off the card with the highest interest rate first, rather than the smallest balance. This can be more advantageous if you have higher balances on cards with higher rates versus other cards. Keep in mind, always look to try and transfer debt off of those high interest rate cards when you can find better rate deals.
Debt consolidation. You can do this on your own by using the transfer method from card to card. You can also potentially get a personal loan, which will bring us to the next item.
Take out a personal loan from a local credit union. Depending on your creditworthiness, you may be able to obtain a personal loan at a much lower interest rate at a credit union to help pay off the other debts. Another advantage of a shorter term personal loan is to show you are paying on time. You can take our a small short term loan, and pay it off quickly. This provides you a positive account. This is especially helpful if you do not have existing credit, or very little credit.
Your auto loan should come from the credit union. Unless you got an awesome rate from your dealer, then use a credit union. Their rates are typically much lower. You can also refinance your existing loan with them and potentially save money.
Debt management plan. If you are at the point where it would be easier for you to get help, please reach out to a non profit credit counseling agency. The goal here is to consolidate credit card debt into one payment, with lower interest, stopping the late fees, and stopping the harassing phone calls from creditors. Credit counseling will charge you, but it’s a small fee well worth it many times.
Debt settlement. The ability doe exist to settle a debt with a creditor for less than the balance owed. But there are upsides and downsides. There will be debt settlement companies who act as if they are credit counselors, offering to take your debts and put them into one payment, as well as stopping the harassing phone calls. In reality, the phone calls will continue, even as the company and you will repeatedly tell the creditor to “talk to your attorney at 555–5555” — — a fake attorney this company will provide you. Supposedly the company is going to use their own snowball approach, and try to settle the lowest balance card first as they go along. I was only successful in getting one card settled this way, after harassing the company I was paying to do this for me. Of course once that was done, American Express then black listed me for several years. The easier route, is trying to settle with the creditor directly. This of course only works if you have a lump sum sitting around to pay them off right then and there, which likely you do not. However, I did do this with another card at one point. What they will not tell you is, that any difference in the amount settled is considered income with the IRS. You owed them $5000. You settled for $2000. The “income” is then $3000, which you did not have taxes withheld from. They are supposed to send a 1099 form for tax filing. This particular company did not. I found out the hard way when the IRS then did an audit and came after me for unpaid taxes.
Bankruptcy. You have 2 options here. Chapter 7 and Chapter 13. I am not an attorney, thus can’t say which you’d be eligible for. But the difference is Chapter 7 discharges all of your unsecured debt (except for student loans). Chapter 13 will put you into a repayment program, much like debt consolidation. It is supposedly more difficult to file Chapter 7 than in the past, but I did actually file myself. I was over $25,000 deep in credit card debt and it went away after paying my attorney $1500. I still had a student loan, and I did get to keep my car and continue paying it off. But for me, that was the best option at the time. Bankruptcy will remain reported on your credit report for 10 years. This will make getting credit challenging, but it is possible. In my case, I just stopped using credit cards for a while and was cash only — which is a good idea at first. Though, credit card companies were sending me new card offers right away, because in their eyes you no longer have debt. But, the offers were for secured cards and high rates with low available credit. They are not always the best option, but they do help build your credit score back up if you of course pay on time. But the end goal for creditors is to hook you back into the endless debt cycle, so be careful. They exist to make money off of you, not help you. That being said, if you do not have credit, your FICO will plateau at some point, no matter how good you are.
I hope what I have provided helps some of you in your credit journey. I know for me personally, the road was bumpy, but I have been in that exceptional score range for a while now. With time, effort, discipline, and some lifestyle changes you can do it too.
