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Credit Repair

Find out how to use credit repair tactics to get a better credit score.

Erasing a low credit score begins with obtaining a copy of one's credit rating. [©Shutterstock, 2010]
©Shutterstock, 2010
Erasing a low credit score begins with obtaining a copy of one's credit rating.

Credit repair is essential for consumers with low credit scores. Better financial planning and the correction of credit report mistakes can greatly improve one's credit score.

What is a credit score?

Credit scores are one measure that banks and other lenders use to determine a consumer's credit-worthiness. The score often affects loan interest rates as well as the ability to secure a loan. In some cases, employers or landlords use credit scores to determine an applicant's reliability.

The following five categories determine credit scores:

  • Payment history (35%)
  • The amount of money owed to creditors (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Types of credit used (10%)

Credit scores can range from 300 to 850, with a higher number indicating a better score. Consumers with high credit scores may be able to secure loans more easily and may be offered lower interest rates on those loans. People with low scores should consider credit repair.

Steps to Credit Repair

Consumers thinking about credit repair should consider their options carefully. Some companies claim to be able to guarantee a better credit score in a short time, but the Federal Trade Commission suggests that these types of companies often are unreliable. In most cases, consumers can repair credit themselves.

The first step to credit repair is to order a copy of one's credit score. This information not only shows the score, but also lists all of the debts owed and payment history. Having a copy of this report allows a consumer to look for mistakes or outdated information that may be negatively affecting the credit score. Consumers are entitled to a free copy of their credit report once per year or if a company has taken an adverse action against the individual, such as denying a loan or employment because of a low credit score.

If there are mistakes on the credit report, the consumer can take action to have them removed by sending a letter to the reporting companies with documentation that shows the mistake. Consumers must also send proof to the creditor that is reporting the information. This is relatively simple to do and the FTC offers a sample letter and advice on doing it.

If there are no mistakes on the credit report, then a low score is a result of an individual's actions. In that case, the individual correct the behavior that caused the low score. Consumers should be sure to always make payments on time, since payment history represents 35 percent of the credit score. If there is a particular account where the consumer is behind, the individual should strive to get that account up to date and then make timely payments.

Other ways to repair bad credit include keeping low balances on credit cards, paying off any loans, and always keeping credit available. Consumers should also make sure to not open too many credit cards at the same time, as this presents another red flag to lenders.

Fixing mistakes on a credit report is the only way to quickly improve a credit score. Other factors affect a consumer's credit score for at least seven years. Bankruptcy shows on a credit report for 10 years.

Credit Repair Help

Credit repair can be an overwhelming process; so many people are tempted to turn to companies for help. It's important that consumers look for legitimate companies when getting credit repair help.

Some credit repair companies work with individuals, creditors and the credit agencies to resolve any disputes on the person's credit report. There are also non-profit agencies, such as American Consumer Credit Counseling, that help consumers take control of their finances, thus helping to improve their credit score. Rather than working only with mistakes on a credit report, non-profit credit counselors help consumers learn better financial habits through budgeting. They can help consumers learn about debt reduction and how to stay out of debt. Once consumers get control of their debt and cash-flow problems, it's easier for them to maintain a high credit score.

Credit Repair Scams

When consumers want an easy answer to their credit repair problems, they may look to companies that claim to offer a quick fix. Unfortunately, many of these are scams and consumers need to be careful.

According to the FTC, there are some surefire ways to spot a credit repair scam:

  • The company requests money for services upfront, which is illegal under the Credit Repair Organizations Act
  • The company does not mention the free ways a consumer can improve his or her credit score
  • The company advises consumers to cease communication with credit agencies
  • The company claims to be able to improve a credit score, even if the negative information on the report is legitimate
  • The company tries to get a consumer to create a "new identity" as a chance to "start over"
  • The company tells consumers to dispute all negative information on the credit report, even though it may be accurate

If consumers come into contact with such a company, it's better for them to handle credit report disputes by themselves. If help from a credit repair organization is sought, it is wise to consult the local Better Business Bureau to check the reputation of a credit repair company.

However, consumers who have already lost money to unscrupulous credit repair agencies do have recourse. Because most states have laws that regulate the actions of credit repair companies, an individual that used a bad company can contact the state's district attorney for help.

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