Credit Repair Guide
Who Needs Credit Repair?
In our last guide, we went over credit basics. It provides a great foundation for everything you’re going to read here. It explains exactly what credit is, what goes into your credit history, and how credit agencies and lenders view your credit score. Today, we’re going to dive into the world of good and bad credit. This section of the guide will show you through the different categories of credit and what could be affecting your credit score positively or negatively. By the end of this guide you’ll understand the benefits of having a good credit score and how a bad one could be holding you back. In addition, you’ll know what you can do to get your credit score where you need it to be.
Have you had an application for a car, credit card, or home loan rejected? Maybe you didn’t know exactly why you couldn’t afford the things that you wanted. Your income is good, but you think your credit might be bad (even rich people can suffer from bad credit). Credit is a tricky thing and in order to take control over your credit history, you’ll need to understand how it got there in the first place. You’ll need to know exactly how banks, lenders, and credit agencies see your credit score. In addition, we’ll help you understand what could be holding back your score and how to get it exactly where you need it to be.
How to Repair Credit Mistakes
Making your payments on time is essential to fixing bad credit. While an essential part of building credit, there is much more to repairing credit than simply making your payments on time. Last time, we discussed how debt, credit utilization, new loan applications, and credit reporting errors can all affect your credit score as well. Let’s specifically talk about where your credit score is, and how you can go about fixing problems with debt, credit utilization, and new loan applications (we’ll get to credit report errors a little bit later).
What is a Good or Bad Credit Score?
Three bureaus, mentioned in our last section, use a scale of “bad” to “excellent” in order to grade your credit score. Generally speaking, a score of 300 to 629 is considered bad credit. 630 to 689 is average or fair credit. 690 to 719 is good credit and 720 and up is excellent credit. It’s crucial that you understand this scale of grading and exactly where you fit on it. Even if your credit isn’t where you want it to be, knowing this information and understanding the scale will help you improve and get where you need to be.
Let’s start with bad credit. Anyone can fall into bad credit habits and discover them if you aren’t paying close attention. Maybe there were some missed credit card payments, you paid your student loan payments late several times, and your car payment is harder to manage than you anticipated. These are all simple examples of everyday hardships that happen to all of us. However, if it goes on for too long, your credit can go downhill fast, which means banks will be much less likely to want to approve your application for a new loan. The good news is, if you’re like many millions of Americans in this same exact spot, you can always get your credit score to a more desirable place.
Fair Credit or Average Credit
An average or fair credit score is what most Americans are working with. This usually means that you may have had a few late loan payments, but for the most part you try to stay on top of recurring bills. It’s possible that you’re making most of your payments on time. Your credit cards are at or close to their limit and on top of that, you’ve got a few more lines of credit to worry about. You’ve got quite some time left on your car payments, credit cards, and student loans. It feels like you’re chipping away very slowly, but you’re doing what you can to be responsible. This isn’t a bad place to be. However, banks may be reluctant to let you borrow more money at this stage. An average credit score isn’t too far from a good score, if you can remain vigilant about your payments.
Good credit can be achieved by those who have started paying off their debts and are maintaining a low balance on their credit cards and other loans. If you make one late payment, it’s not a big deal because the credit agencies can see that you’re really working down your loans. You’re not dependent on credit cards to get your bills paid on time, but you still use them occasionally (and pay them off quickly) to keep your credit score high. Maybe your car is now paid off or close to paid off and you’re not in a rush to go get a new one. You’re focusing on one or two lines of credit that have your sole attention. You’re in a good place for getting a new loan if you need it — maybe you’re thinking about buying a house! Just make sure, before you dive into any additional debt, that you can manage it just as well as you are now.
Of course, excellent credit is the best place to be if you want to be approved for a new loan. However, it does take some diligence on your part. You’ll need to be in complete control of your credit. This means you’re making all of your payments on time, but you’re using your loans to your advantage. As with good credit, you’re using your credit card occasionally and paying it off. Maybe you’re even putting a little extra down on your car or student loan payments. Your credit history shows good credit habits over a long period of time. The key part being, you do need to have loans and/or credit cards. If you decide to pay off all of your loans and continue without them for too long, your credit will start to reflect that of someone with no credit, rather than excellent credit. This is the ideal space for anyone to be in to get approved and pre-approved for a new loan. It also becomes much easier to negotiate a lower APR on your credit cards or existing loans.
When Do I Need a Credit Score?
Now that you understand which category your credit score is in, you can begin to take a look uses of credit. There are traditional uses like home loans, student loans, credit cards, and auto loans. However, your credit might also be checked in other circumstances, like applying for an apartment, refinancing a loan, or even starting up your own business.
In any case, it’s a good idea to have a grasp on your current credit score as well as mapping a plan for improving it. Once you know where your score is, start working on minimizing any debts that you currently have as quickly as possible and make sure that you make all of your payments on time. These are the two largest factors of an excellent credit score.
Monitoring Credit and Making Credit Inquiries
When you’re ready to make a large purchase, such as a car or home, you may want to become pre-approved for a certain amount of credit. You don’t want to have too many credit checks go through per year. This can negatively impact your credit score over time. Although, if your finances are in order and your credit score is just about where you want it to be, getting pre-approved for a loan is a smart decision. It arms you with the knowledge of knowing exactly how much money you have to spend and may even give you an upfront estimate as to what your potential loan payments might look like. This way, you can start adjusting your finances accordingly.
What Affects Your Credit Score?
The number one reason that your credit score could be low is that you are overwhelmed by debt. If your credit cards are maxed out and you feel like you’re forced to make consistent late payments, your credit score is suffering as a result. Don’t be scared. Millions of Americans are in this exact same position. Your main goal should be to rid yourself of all or most of your debt and make your payments on time before you even think about applying for another loan. It’s incredibly easy to feel like you’re drowning in debt after college, owning a few credit cards, a car, and possibly a home. That’s enough to make anyone feel the financial crunch. Yet, there are other factors that you might not be aware of that could be negatively affecting your credit.
Your credit score is not only dependent on the amount of loans and credit that you own, but also how much of them you’re currently using. Credit utilization ratio is a fancy term that assesses whether you’re using a majority of the credit offered to you or not. For example, if you’ve got a credit card with a $1000 limit and you’re using $950, you’ve got a high credit utilization ratio. This can be a big red flag for lenders and stop a loan approval dead in its tracks. If a lender sees that you’re tapping out your available credit, they tend to believe that you’ve got your hands full and to offer you more credit than you’d realistically be able to pay back would be a mistake on their part.
New Loan Applications
In addition, multiple loan applications in one year can also affect your credit score. For example, if you were to apply for an auto loan a few times in one year, all of those applications are reported on your credit history. They are sent over to the credit bureaus and they will be included in your credit score. One agency may see all of those applications and decide to score your credit according to one application, noting that you are simply shopping around, and the other two may decide to use each application individually. This is where credit repair comes in.
If you take a look at your credit report and see multiple instances of the same issue, you are entitled to ask for consolidation on your credit report. By doing so, you may see an improvement to your overall credit score. It is your right to contact the agency yourself and ask for the fix. However, many individuals prefer to go through a credit repair agency that can do the hard work for them. The other benefit to using a credit repair agency, other than the fact that they are professionals, is that they may see mistakes that you would have otherwise missed. They are well-versed in the world of credit and they know exactly what items should be included and excluded from an excellent credit report. They will be able to provide you with clear, sound advice towards improving your credit score.
Getting Help from Professional Credit Repair Services
Remember that this service costs money for the hours that these professionals will put in towards fixing any potential mistakes on your credit report. However, these agencies should not offer you an overnight boost in your credit score. Even if a mistake is fixed, you may not see a dramatic change in your credit. It all depends on your situation. In most cases, repairing your credit takes time and dedication. Beware of scam artists that offer “new credit identities” or quickly boosting your credit score by any other means. It may involve identity theft and it just plain won’t work.
Anyone can succumb to bad credit, possibly without even knowing it. Simple mistakes with applications, loans, and even bureau problems with your report can equate to an unappealing credit score. Fixing your credit can seem extremely overwhelming, but it absolutely can be done with or without the help of credit repair services. We even have letter templates you can use. Working on whittling down your total amount of debt and making all of your loan payments on time is the best possible choice you can make for your credit. With a little bit of hard work and possibly some guidance and assistance, you can get your score exactly where you want it to be.
Next: Boosting Your Credit
In our next guide, we’re going to be diving into the world of credit repair. We’ll give you detailed, step-by-step information about exactly what you need to know in order to boost your credit as efficiently as possible. You’ll be able to make a credit repair plan, stick to it, and watch your credit score improve over time. You’ll also be confident about whether or not you could benefit from a professional credit repair service and understand specifically what they can do for your credit score.
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