Repairing Bad Credit: First Steps

If you have the financial means, repairing bad credit can start by re-evaluating your spending habits and allocating additional funds to pay off your debts. However, that may not always be the best solution. In some instances, such as the case of time-barred debt, you’ll need to make some strategic choices in repairing your credit.

The first step is always to take a look at your credit report. When repairing bad credit, you need to see what you’re up against and knowing what’s listed on your report will help you to make the best decisions possible when dealing with your creditors.

Repairing Bad Credit: Negotiate and Pay

Negotiating should only be done when you are repairing bad credit for accurately reported debts you actually owe and have the means to repay. If you do not, then negotiating can actually make a bad situation worse, as your creditors will be less likely to offer any leeway in the way they report your debts. Your best option is to be realistic, always, about your ability to pay.

Furthermore, it can be intimidating to negotiate over the phone. Repairing bad credit through the mail may be a better bet unless you are used to doing phone negotiations. You’ll have time to gather your thoughts and won’t be confronted by an aggressive collection agent. Written correspondence also offers you a chance to get their responses in writing – a very important legal consideration. You want to get everything you can in writing in case you need to dispute the listing. Use certified mail with return receipts so you have a record of attempting to negotiate, as well.

If you do try to negotiate over the phone, always request everything in writing before moving forward. Always pay off your original debtor if you can, because it just looks better on the credit report, especially as the original creditor can remove the report entirely most of the time.

Collection agencies, however, are second party collections and paid to get your debt, pennies on the dollar. Negotiation time. Do not pay them the full amount if you don’t have to, and it is worth adding that it is illegal to charge you a collection fee on top of your original debt so don’t be fooled by their agents’ claims otherwise. You can go as low as thirty cents on the dollar, and be willing to let them talk you up to 50 cents on the dollar.

After you have started negotiations, monitor your credit so you can make sure they did what they said they would do and remove the bad record of your debt. Once you have made payment arrangements, they must fulfill their agreement to report a change in your status with them or if applicable, remove the negative item entirely.

Repairing Bad Credit: Filing Disputes

Sometimes when you are repairing bad credit, you will find items on your credit report that you do not owe, or that are incorrectly listed. Get rid of these items by filing disputes and following up with concrete evidence that the debt is reported inaccurately.

In terms of updating listings, 30 and 60 day past due listings are easiest to prove with your current creditors. They want to get paid – you want good credit. if you have paid on time and have a receipt, it should just be a matter of providing the confirmation number in order to get the problem fixed. Remember — if you use the phone to speak with creditors, try to get them to give confirmation in writing or ask for a phone ticket number to confirm your conversation later. If they aren’t willing to do so, it may be a sign that you need to follow up with the credit bureaus to be sure that your file has been updated.

Repairing Bad Credit When You Have Charge-offs, Liens, and/or Judgments

All of these are going to seriously impact your credit score. Charge-offs are often handled in house by your original creditor, so if you still have an open account with them, negotiate, negotiate, negotiate! Their desire to keep you as a customer (if you’ve previously paid on time) can help make the charge-off it disappear.

However, you will have to pay it off if it is an accurate debt. A charge-off does not mean that you no longer owe the debt — just that the company thinks you won’t pay it off, ever. That’s why a string of charge-offs is essentially poison to your credit score. Repairing bad credit means paying your debts that are valid and timely. If the debt is accurate, you are not going to have a good chance of getting it removed, so negotiations are the only real option.

Liens and Judgments are the ones you absolutely cannot just negotiate away entirely. They have to be paid off before you can get them removed. This does not mean you cannot negotiate with the holder of the lien or the person who has the judgment against you, but very definitely get your paperwork in order before tackling it. You need to back up everything and keep documents, and know when you have it paid off so you can get it removed from your credit record and restore your credit to its potential glory.

Sometimes you may need professional help, especially if you feel that your credit problems are overwhelming, but there are many people who repair their credit all on their own. For those who want to get started repairing bad credit right away, there are a few things you need to know before you dive in.

Repairing Bad Credit: Assemble Your Information

There is no charge to ask for an investigation of information in your file that may be inaccurate or incomplete. Equifax, Experian and TransUnion are required to give you a free copy of your credit report every twelve months if you ask, either all at once or staggered throughout the year. Don’t try to contact them on their own websites — if you want the free credit report you have to use annualcreditreport.com. Otherwise, they could try to charge you for something you should be getting for free. Plus, if you try to get more than one credit report a year from the same company, it could cost up to $10.50.

If you don’t want to use the website, you can call 1-877-322-8228, or get the Annual Credit Report Request Form and mail it to:

Annual Credit Report Request Service

P.O. Box 105281

Atlanta, GA 30348-5281

You can get a copy of the form to print out from ftc.gov/credit.

Repairing Bad Credit: Additional Free Reports

You’re also entitled to ask for a free report if a company denies your application for credit, insurance or employment based on your credit score. Ask for it within sixty days of getting notice of the negative action – you’ll then have the name, address and phone number of the company.

If you’re unemployed and looking for a job within sixty days, on welfare, or the report is incorrect because of identity theft or other fraud, you can ask for a free report as well.

Repairing Bad Credit: Debt Validation

Once you have your credit report in front of you, you want to take the time to go through each item. You may find multiple copies of the same debt listed on your accounts. You may find accounts listed that aren’t yours, or that were closed satisfactorily years ago. Whatever the issues are, you’ll need to request that the debts be verified.

This can be done by writing the creditor, asking for debt validation – the creditor should be able to furnish proof that you owe the debt. If not, you may not have to pay at all.

Disputing Negative Information when Repairing Bad Credit

Always act as quickly as possible to dispute action against you and your credit score. The longer you wait the more likely it is that that score is going to stay there and be reported as accurate.

Removing outdated items and disputing mistakes helps with repairing bad credit and costs you nothing beyond the postage and your time. The Consumer reporting company and the one providing the information to that company are the ones who have to correct inaccurate and incomplete information that appears in your credit report. If you find information that is incorrect, contact both the Consumer Reporting company and the company or person who gave them the information. That is part of your rights under the FCRA (Fair Credit Reporting Act).

Professional Help

If your accounts that are causing your negative reports are older than ten years, or there are a lot of them to go through, you may need to get professional help. A professional will be able to sort through your files and will be able to accurately explain precisely what needs to be done to repair your credit scores.

Additionally, professional credit repair specialists are able to write exactly what needs to be disputed without being dismissed as frivolous just because they know what needs to be said and how to say it.

No matter which route you choose, don’t let yourself get discouraged. Repairing bad credit takes time, but the rewards in terms of financial freedom are worth it.

1. You can save you tons of money on interest. Paying interest can be a necessary, but since you get nothing in return for paying interest, you should try to pay as little as you possibly can. In order to show you just how much money on interest a lower credit score can cost you, let’s look an example of a 30-year home loan worth $200,000.
On a home loan of $200,000, if your credit score were in the 750 range, you could expect to pay around 4.75% interest on that loan (at today’s mortgage rates) – which would mean a monthly payment of $1,043.29 per month. If your credit score were only 100 points lower in the 650 range, you could expect to play closer to 6.25% interest – which would give you a monthly payment of $1,231.43. This difference of only 1.5% in interest would cost you an extra $188.14 per month, and a whopping $67,730.40 over the life of the loan.

2. Repairing your credit will allow you to qualify for a home or auto loan. Not only will credit repair help you to spend less on the loans you qualify for, but it will also make it so that you can qualify for a loan. If your credit score is less than 620, it will be difficult for you to secure financing on a new home purchase, or even on a new or used car.

3. Higher credit limits can provide breathing room in a pinch. Although it’s never a good idea to rely on credit cards or home equity loans for buying things we don’t need, sometimes emergencies come up that require us to tap into our credit resources. It can provide peace of mind to know that if you needed to, you have $10,000 or more in available credit if it became necessary.

4. Become financially independent. Nobody wants to rely on co-signers in order to qualify for a loan, or borrow money from friends and family for a down payment. Asking for help with financial burdens will often strain relationships with those closest to you. Plus, there’s a sense of freedom that comes with knowing that you are completely self-sufficient.

5. Save money on insurance premiums. It may not be fair, but some insurance companies actually consider your credit score when they determine what your insurance premiums will be. Fixing your credit score will help you save money on insurance.

6. Get a job. More and more employers are beginning to do credit checks on their job applicants. Whether or not it is actually the case, employers can view job candidates who have low credit scores as irresponsible. It’s hard enough to get a job in today’s economy without having to worry about losing points with your potential employer because of a bad credit report.

7. Credit repair is a process that takes time. Since you never know when you’re going to need to have a good credit score, it’s best to start the process of credit report repair as quickly as possible. Repairing your credit is a process that can take several years, so the sooner you begin, the better off you will be. You don’t want to wait until you find your dream home or the perfect car before you find out that your credit isn’t good enough to qualify to buy those things.

Your credit score is not determined by any one type of credit. Loans, credit cards, and other financial obligations all play a role. In general, credit cards are an important aspect in boosting credit scores because credit cards are an ongoing gauge of how well you pay back your debts, how you manage debt, and how responsible you are when it comes to spending. If you can maintain low balances, pay your credit card bills on time each month, and maintain a solid history of repayment, your credit scores will rise.

Getting rid of credit cards in an attempt to boost your credit scores will backfire. A better option is to choose one or two cards with a decent interest rate, and keep those accounts open and current. You don’t need to charge much – it’s actually better if you keep your purchases anywhere from 10% – 30% of your overall credit card limit. This demonstrates to creditors that you can be responsible with the credit you are given. It also makes it easier for you to pay off the credit card in full each month, which is another way to rebuild your credit scores.

If you have several credit cards, you may wonder which cards are best to keep, and which accounts (if any) you should close. In general, keep your credit card account open if:

You’ve had the card for several years. Having a long credit history is more beneficial than having a short one.

You have a balance on the card. Canceling an account while you still have a balance can wreck havoc on your available-credit-to-debt ratio.

The interest rates are low. Lower interest rate cards can not only save you money, but they can make it easier for you to stick to your repayment goals as well.

When should you cancel a credit card? In general, if the interest rate is high, or if the credit card company uses double-billing, it’s probably a good idea to get rid of that card as soon as the balance is paid off. The only exception to this is if the credit card is one with a long credit history. You don’t want to cancel your oldest cards, so in this instance, your best option would be to charge a very small amount on the card each month, and then pay it off again as soon as possible to avoid the extra interest hit.

If you are trying to rebuild your credit, you don’t currently have a credit card, and don’t think you can qualify to get one, try a secured credit card instead. With a secured card, you put down a deposit for a specified amount (usually anywhere from $200-$500) and in exchange you receive a credit card with a limit equal to the deposit. Charge only a small amount on the card, and then pay it off each month – this will let you build your credit, even if you don’t initially qualify for a regular credit card.

Regardless of which route you choose, getting and maintaining a credit card account is an essential part of any credit repair plan. Don’t assume that all credit is “bad” credit. If you want to be successful in increasing your credit scores, you’ll definitely need a credit card – just be sure to pick one that’s easy to manage, and don’t let the balances get out of hand.

Scenario 1: Refinancing High-Interest Credit Card Debt Using Home Equity

This scenario has been commonly used by many companies claiming that they can lower your credit card debt. By taking out a second mortgage using home equity, a person can pay off high interest credit card debt with the funds received. There are several problems with this scenario:

You must have equity in your home to qualify. This means that for new homeowners, this type of financing option is unavailable. However, in the current market, this is actually a good thing and here’s why:

Financing credit card debt through a mortgage trades an unsecured debt for a secured debt. This means that when you use the mortgage money to pay off credit cards, you’ve essentially tied your home ownership into your ability to pay off the debt. If for some reason you default on the second mortgage, you can lose your house. While credit card debt and late payments may be damaging to your credit, they are unsecured. The credit card company can’t take away your purchases made with the card, but the bank can and will take away your home if you default on a mortgage.

The last problem with this type of scenario is that it is not foolproof – if you decide to use your credit cards again for purchases, then your debt problem doubles. Many times, people who try to eliminate credit card debt end up with more credit worries as they have to make payments on two mortgages and the new credit card charges.

Scenario 2: Consolidating Student Loans

If you are making payments on multiple student loans, consolidating those loans can seem like a smart idea. In some cases it is, however, if you are still in school there are better options available.

• Forbearance – if you are unable to make payments, you may qualify for forbearance. There are several types of forbearance, including one that applies if you are not making enough money to meet all of your financial obligations.
• Deferment – this is usually the best option if you are still in school. Even if you are only taking classes half time, you can get a deferment on student loan payments. Just be sure to have your school verify that you are attending, and continue to take enough courses to qualify for in-school deferment.

Once you consolidate your current student loans, you cannot re-consolidate at a later time. Therefore, if there is a chance you will be taking out further student loans, your best bet is to use forbearance or deferment options, and only pay the interest on the loans until you are able to meet the financial obligation.