How to repair your credit?

Are your loan applications getting rejected because of a low credit score?

Are you worried about your monthly installments against student federal loan?

Are you paying more? Can you save on student loans? 

If you do not have money to pay a professional to improve your credit score, you still have the option to improve your credit scores yourself.

Yes, you read it right!

You just need to understand your consumer rights under the Fair Credit Reporting Act and you can repair your credit score.

Before we discuss in detail how to repair credit, we should debunk some common myths about credit cards.

Is it a myth or reality?

Today, with this reading, we will get a deeper understanding on how to use a credit card and how it affects the credit score.

There are many rumors related to credit cards like whether to keep a card open, how to use a credit card, and when to pay it off. Not understanding how credit cards work can inadvertently harm your credit score. 

Let’s discuss them one by one-

1. Myth: Keep only one credit card open

The myth is that people should not keep more than one credit card open.

Check: Having more than one credit card open can decrease the credit score for some individuals but not for everyone. 

In fact, opening more than one credit card will increase the credit score potential over time. This happens because you demonstrate to lenders and creditors your ability to manage more than one credit card at a time. For a responsible individual, multiple credit cards can increase the credit score long-term. 

Suggestion: If you are a responsible individual, the best recommendation is for you to open a few new credit cards every year. Look for cards that will provide the best discounts, rewards, and cashbacks for your type of monthly spending. If you are not responsible and will accumulate unnecessary debt that you cannot pay off in a reasonable timeframe, then you can decrease your score.

2. Myth: Never own a credit card

Many consumers have the misconception that one should not own a credit card because it leads to unmanageable debt that ultimately puts financial stress on them.

Check: For a responsible person to establish credit, owning a credit card is one of the easiest ways. If you can manage your financials and have the capability to stick to your budget, you should be able to handle credit cards easily. Responsible credit card use will build your credit score.

Suggestion: If you can manage your finances and be a responsible credit card user then you should have them. Credit card users may not be aware of the potential risks of overspending, consequently they damage their credit scores. This can occur because they incur unmanageable debt and unpaid credit card bills. This results in lower credit scores.

One thing worth noting is that having no credit payment history results in no credit scores because you will not have any payment history to determine a score. So, it is important to establish a positive credit history.

3. Myth: Never Increase the credit limit

Most credit card users receive offers from credit card agencies stating- You can increase the credit limit on your card!

Check: Such offers are often ignored by cardholders because they assume it is a deception by the lending agencies. This is not the case.

Yet, asking lenders to increase a card’s limit is another way you can help boost your credit scores.

How does it work?

If you have a current limit of $1000 on your card and you spend $100 a month, your utilization will be 10%. 

Let’s assume you receive an offer from the credit card company to increase the credit limit to $1500.

If you do not accept the offer, your utilization score will still be 10% with no impact on credit score.

If you accept the offer, your utilization score decreases to 6.67%, provided your expenditure remains the same.

This can significantly increase your credit score.

Suggestion: Requesting a limit increase on your credit cards will help reduce your overall utilization ratio and will boost your credit scores. Call your lender and ask if this request will result in a hard inquiry on your credit report.

4. Myth: Always go with free credit cards

People consider that they should not own credit cards that charge fees. They prefer to own card without any annual charges. They think that credit cards without annual fees provide more value and benefits than a paid one. 

Check: Credit cards with annual charges offer differential benefits. A long list of benefits includes lounge access at airports, substantial discounts at restaurants, groceries, merchant outlets, show bookings, etc. An important point worth noting is that benefits weigh more than the annual fees. Different categories of credit cards offer different benefits. To gain maximum advantage, you should opt for a card as per your spending.

Suggestion: Gauge your expenditure carefully and own a credit card which suits most with your lifestyle.  

1. Myth: Paying credit card balances and when it is best to pay it off

Many people think that if they carry a balance in their credit card, it will help them to increase their credit score. They pay only the minimum payment each month to show the lenders that they have the capability to pay their debt. 

Check:  This is not true!

Only timely payments and paying the full balance can increase your credit score. Pay the minimum payment only if you cannot afford to pay the full amount. Keeping a balance on your credit card month to month never helps you to increase the score, however it can decrease your credit score. This also increases your credit utilization ratio which in turn reduces your credit score. Making minimum payments will also accumulate interest on your principal balance and will end up costing you a lot more when you finish paying off the total balance. 

Suggestion: Always pay your credit card balances in full each month if you can and more importantly always pay them on time. 

How to repair your credit?

When repairing your own credit, you should be aware of some important terms, definitions, and facts. 

Please find the list below- 

1. What is a credit score?
2. What is negative credit information?
3. What is a credit report?
4. How to dispute information on a credit report?
5. How to increase your credit score?

What is a credit score?

When you think of lending money to someone, there is a risk associated with that lending. This is the reason why banks charge some amount of the loan in the form of interest. Even when you deposit some money in your bank account, you get some interest on it. The payment that the bank pays as interest is a lot less than what you pay them on a loan because the deposits in the savings account are almost risk-free.

How will you know the credit worthiness of someone when deciding to lend money or not?

When lending to a friend, you already have an established relationship with them.

When searching for a local bank to partner with, you check the history of the bank, its customer service, and its interest rates.

In the professional world, potential creditors and lenders do not know your ability to pay on time so they check your creditworthiness with a credit score.

A credit score is a three-digit number, used by banks, lenders, creditors, and companies to calculate the potential risk they are taking by lending money to you. Apart from banks and lenders, this score is used by agencies like telephone companies, insurance companies, government organizations, landlords, etc. to check the financial background of a person before offering any service to him.

The major three credit bureaus who calculate credit scores are- Experian, Transunion, and Equifax.

The credit bureaus use different methods of calculating credit scores. FICO scores developed by Fair Isaac Corporation are the most used credit scores in the United States. Consumers enjoy better terms on loans and insurance premiums when they maintain good credit scores.

What is negative credit information?

Any information on your credit accounts that increases your risk of borrowing capital from lenders and creditors is considered negative information. It includes- bankruptcies, late payments, foreclosures, repossessions, collections, etc. 

With time the impact of negative information reduces, but it cannot be eliminated completely until after 7 years have transpired after your last payment. Late payments, foreclosures, Chapter 13 bankruptcies, collections, and charge-offs impact your credit history for seven years while a Chapter 7 bankruptcy does for 10 years.

Under a Chapter 13 Bankruptcy, a person develops a payment schedule to pay debts that are prioritized based on debt amount and debt type. In this case, assets are not liquidated.

Under a Chapter 7 bankruptcy, there is no payment plan but the assets are either sold out to a lender or liquidated to pay off the amounts owed to lenders.

You should avoid any negative credit information on your credit reports when possible. There are some tough circumstances in a person’s life that (s)he cannot avoid. There are ways to compensate for the impact of negative information by building positive credit information. The easiest way is to apply for a credit card and making timely payments each month. This is a great start to re-establishing your credit after a financial hardship.

What is a credit report?

So far, we have been continuously talking about a credit score and how negative information on a credit report affects it.

Now, is the time to understand what this credit report is?

A credit report is a list of your bill payments, current debt, loans, and other important financial information that is important for a lender to know to determine your creditworthiness.

It also contains information on-

1. Where do you live?
2. Where do you work?
3. If you have been sued?
4. Have you filed a bankruptcy?
5. And a lot more information about your financial life.

Credit Report helps lenders to decide-

1. Whether to approve your loan or not?
2. Whether to rent you a property or not?
3. The interest rate for the loan
4. and much more

A credit report is generated by three major credit bureaus-

1. Experian, 
2. Transunion and 
3. Equifax

Every credit reporting agency maintains your credit report based on most of your accounts that they can access. The reports generated by different agencies may deliver different credit scores but the scores and reports that are generated by different agencies are more or less similar.

How to dispute information on a credit report?

Everyone should check their credit scores and examine their credit reports regularly. Get your credit report from a credit repair expert. If you find any incorrect information in your credit reports, then you can dispute it with the credit reporting agency.

Please follow the step by step approach given below-

1. Get your credit report from a credit-reporting agency
2. Examine your report thoroughly
3. Identify disputable information or entries in your credit report
4. Write a letter to the credit reporting agency for the inaccurate information
5. Write a letter to the lender that submitted the inaccurate information
6. Keep a copy of all the letters with you
7. If your request is accepted and information is corrected, you are done
8. If your request is not approved immediately, get help from Consumer Financial Protection Bureau
9. If the issue is still not resolved, contact a credit repair specialist. 

How to increase your credit score?

First, resolve all the disputes on your credit report. Once that is completed then work on building positive information on your credit reports. You may need the guidance of a credit agent for this.

Here is an effective quick guide for you to follow-

1. Pay your utility bills on time 
2. Pay your current accounts on time. If you don’t have a credit card, apply for one, and ensure to make timely payments.
3. Pay down your debts
4. Resolve debts in collections
5. Be a responsible and organized person and manage all your credit accounts wisely
6. Avoid opening multiple credit accounts if you will spend beyond your means

Financial awareness is very important for a person to maintain a good credit score, to improve/ increase a credit score, and to build positive information on your credit accounts.