If you have a poor credit score and don’t know where to start, then this guide is for you. This guide can also help with boosting an already solid credit score so it is quite applicable to everyone and not just those that are experiencing issues. The first thing you must do to start your road to recovery is:
Know Your Credit Score
It is very difficult to come up with a good strategy on how to recover your credit score if you don’t both know your score and have a current credit report. The 3 credit bureaus are Equifax, TransUnion, and Experian. You are able to get a free report from each of these sites but they will only show you the score for their respective bureau. There are several other well respected credit reporting agencies that will provide you with more in-depth reporting and monitoring and can be useful to help keep a watchful eye on your credit. Alternatively, a free credit report for all 3 bureaus can be garnered from annualcreditreport.com once per year for free.
Once you have obtained a copy of your report, take a note of your credit scores. When you apply for a loan, most lenders will use the middle of the three scores as your official score. It is important then that you evaluate your current credit standing by the same metric. Any score over 700 can be qualified as a “good” score. There is still room for improvement with a score like this but in general, you will be able to obtain any type of loan or line of credit you are seeking with a score over 700. Anything below that 700 number needs some work in order to get into that secure area.
Analyze Your Credit Report
Now that you have obtained your report, the next step is to meticulously go over it and look for errors. Almost every credit report will have at least one error that can cause an unnecessary drop in your credit score. These errors can be a collection that was paid but still registers on your report, a payment flagged as being missed or late when it truly wasn’t, or a multitude of other minor inconsistencies. These errors are the first thing that need to be addressed when reviewing your report.
It can be a quite overwhelming amount of information when you first look at your credit report. There are 4 major groups in the report to analyze individually that can help to break up the information into manageable parts.
Part 1: Identifying Information
This part is quite simple, it is just information about you. This part should be the easiest to check for consistency, but don’t be concerned if there are multiple variations of your name present such as with and without a middle name or initial. These variations are not an error and do not alter your report.
Part 2: Credit History
The second part is your credit history. This section includes the name of the creditor and the associated account number. Be sure in this section to make sure that you recognize all of the creditors and that the dates of when the credit line began and ended are correct because duration of these credit lines and number of credit lines does factor into your credit score. This section is generally the largest section and where you should focus most of your attention to insure that everything is correct. Verify that payment histories are correct in this section as well as missed payments can have a huge detrimental effect on your score.
Part 3: Public Records
If this section is not blank, start doing everything in your power to make it blank. This is a section dedicated to bankruptcies, liens, collections, and various other negative financial listings.
Part 4: Inquiries
This section is a listing of all inquiries into your credit score (be it by you or by a lender). It is important to note in this section that a check of your credit by you will not cause a negative affect on your score. Inquiries by lenders however can negatively affect your score by a point or two so make sure that you are positive you want someone else to be able to check your score before you give sign-off for them to do so. Insure that you are aware of all of the inquiries that show up in this section for the reasons listed above.
Document Your Disputes
Any and all supporting documentation you have when making a dispute will greatly help your case. Be sure before sending any documentation to the credit bureaus though that you have made copies of all of the papers for your own records in case anything gets misplaced. Also, be sure to request that the bureau send you an updated copy of your credit report once the inaccuracies are removed so you can see your updated score.
P.O. Box 740241
Atlanta, GA 30374-0241
P.O. Box 2104
Allen, TX 75013-0949
760 W. Sproul Rd.
Springfield, PA 19064-0390
Be sure when sending in disputes that you are filing to the correct bureau. Each one is reported to individually and an inaccuracy on one may not necessarily be there on the other (but be sure to send the dispute to any and all bureaus that the inaccuracies occur on). Alternatively, reports can now be filed with all 3 bureaus online at their respective websites.
Another important note is the credit bureaus are just reporting to you what is given to them. Generally they are on your side and trying to help fix all disputes so be sure to give them any information they need so they can help you to the fullest in correcting any issues found on your reports.
Now that you fully understand your score, how to read your report, and have taken steps to correct all the issues found on the report, you can now start making changes in your financial life that will positively impact your credit score.
Pay Down Your Debt
As we previously discussed, your current debt amounts account for 30% of your credit score. This is second in proportion only too payment history (which will indirectly benefit from paying down your debt due to your constant and diligent payments). While other areas that make up your score are definitely important, this is the area that can see the most dramatic gain in the smallest amount of time so you can give a solid initial boost to your score while making positive financial alterations going forward.
Before we continue it is important to understand the difference between “good debt” and “bad debt”. Good debt is the debt that is necessary and is vested in something that holds value. This would be mortgage loans, car loans (given they are within reason), student loans, or small business loans. These debts are being used to make a positive impact on your life and are often necessary to live. Bad debt is things like credit card debt or any sort of collateralized loan such as a “Titlemax” style of loan where you have terrible interest rates and not paying the loan in a timely fashion can result in a loss of assets. This is the debt that you need to target first when beginning to pay off debts as these kinds of debts are much more immediate and with the exorbitant interest rates generally charged, can be extremely costly if they aren’t settled quickly.
Obviously the fastest way to pay down your debts is to take money out of savings and put it towards your debts. This is a good strategy to a degree. You don’t want to be cash poor and debt free, but at the same token you don’t want to be cash rich but carry huge debt. This balancing act is something that will have to be evaluated on a case by case basis. Focus these funds at paying down your bad debt, then move on to your good debt.
Paying down your good debt doesn’t require shifting assets out of savings to immediately pay them down. Good debt should be paid down by increasing payments each month by as much as possible without stretching yourself too thin. Just paying an extra couple dollars per payment can cut years off of a 30 year mortgage. This serves two purposes. First and foremost paying a little bit extra will slowly work down your principal which will lower your total debt and increase your credit. Second, it allows you to completely pay off your debts years earlier resulting in a great deal of increased income down the road. The most important thing to note is to only implement this strategy once you have cleared yourself of the high interest and costly “bad debt”.
Paying off your debt will vastly help your credit and can get you started on the road to good financial habits. Do everything possible to settle your high interest debt and start working towards removing your long-term debt and you will begin to see remarkable changes on your credit score.