If you are like many Americans, your credit score may be lower than average and your debt may be higher than you would like.
A bad credit or low credit rating can make your financial life difficult and more expensive in many ways.
By Colin Nass, CFP®, AEP®, RICP®
You may know that a low credit score affects your ability to borrow money, but did you know:
- People with bad credit have to pay higher interest rates for loans and credit cards.
- Insurance companies check credit scores and often charge higher premiums to drivers with bad credit.
- Landlords check credit history when making rental decisions.
- Utility companies check your credit to determine if a security deposit is required.
- Some employers check your credit before extending a job offer.
These are all reasons to take steps to repair your credit as soon as possible.
Low credit can be an even bigger problem for pastors or church workers who often find themselves in lower paying positions. Student loan debt and credit card debt can be two of the biggest contributors to bad credit.
If you suspect that your credit is not the best, plan to fix it ASAP. We have all seen or heard advertisements for credit repair, but you don’t need to spend the extra money on these services. There is nothing a credit repair company can do to improve your credit that you cannot do on your own.
Follow these steps to repair your credit:
Step 1: Request updated copies of your credit report
You will need to review your credit report to determine what negative items are affecting your credit score. For free credit reports from each of the three credit bureaus (Experian, TransUnion, and Equifax), visit www.annualcreditreport.com or call 1-877-322-8228.
It is a good idea to order all three credit reports, as some creditors and lenders may only report to one of the credit bureaus. Since credit bureaus generally do not share information, it is possible to have different information on each of the reports. Obtaining all three reports will provide a complete view of your credit history and allow you to repair your credit at all three bureaus.
2nd step: Examine your credit reports for errors
Read your credit reports carefully. There is a lot of information included, especially if you have a long credit history. They each contain your personal identifying information, the detailed history of each of your accounts, anything that might have been listed in public records (like a bankruptcy, for example), and credit checks that others have. done on your credit report.
Step 3: Decide what you need to fix
Here are some types of information to consider:
- Incorrect information, including accounts that are not yours, payments that were incorrectly reported late, etc.
- Overdue accounts that are overdue, debited (over 180 days late) or sent to collections.
- Maximum accounts that exceed the credit limit.
Contestation errors. Once you have reviewed your credit reports, you have the right to dispute any information that is inaccurate, incomplete, or that you think cannot be verified. Credit reports come with instructions on how to dispute information online, but you can also file disputes over the phone or by mail.
Filing your dispute online or over the phone may be the fastest and easiest method, but you end up without a paper trail. Using certified mail may be the safest method since you will have proof of the date sent. This is important because the credit bureaus have 30 at 45 days to investigate and respond to your dispute.
Attach a copy of your credit report to your dispute and copies of any supporting documents. You can also send your dispute directly to the bank or to the creditor who entered the information on your credit file. They have the same legal obligation to investigate and respond to your dispute.
If your dispute is successful, your credit report is updated and the bureau will alert the other credit bureaus and send you an updated credit report. If your dispute is not successful, your credit report will be updated to show that you have disputed the information. You will have the option of adding a personal statement to your credit report. It will not affect your credit score; however, a personal statement provides additional insight into your dispute.
Step 4: Update overdue accounts
Once you’ve fixed the errors on your credit report, focus on your payment history. It impacts 35% of your score. Thus, multiple delinquent accounts on your credit report will significantly affect your credit score. Aim to have all overdue accounts reported as “open” or at least “paid”.
Make payments on overdue but not yet debited accounts to keep them up to date.
When you pay a direct debit in full, your credit report will update to show the account balance in $0 and the account as paid. The write-off status will remain on your credit report for seven years.
Address all accounts sent to collection agencies. Pay the account in full if possible. Collection accounts will also remain on your credit report seven years after they are paid.
Step # 5: Pay off high account balances below your credit limit
Your credit usage, the ratio of the amount of revolving credit you use to your credit limit, is 30% of your score. Maximal credit card balances lower your credit score and add costly over-limit fees. Ideally, credit card balances should be lower 30% of your credit limit.
Most of us will have a limited amount of money in our budgets to spend on credit repair each month. We must therefore prioritize.
First, focus on the accounts that may be overdue. Bring as many accounts to current status as possible.
Next, work on paying off credit card balances and possibly refunds.
Third, address accounts that have already been debited or sent for collection.
Once you’ve done that, making timely payments and keeping your balances below credit limits will help your credit score and add positive information to your credit report.
Don’t be put off by failures. Your credit score may drop as you go through the credit repair process, but that doesn’t mean you’ve done anything wrong. Keep adding positive information to your credit report and your credit score will increase over time.
Colin Nass, CFP®, AEP®, RICP® is the Senior Director, Financial Planning at MMBB Financial Services. He uses his over 20 years of financial planning and investing experience to help members achieve their financial goals.
The information provided in this article does not constitute and is not intended to constitute legal advice; instead, all information is for general informational / educational purposes only.