When you don’t understand the ins and outs of how credit works, building a solid credit score is kind of like building a house of cards. Even if you put in years of effort, it can all be undone by a few bad choices.
Given the fact that 1 in 4 Americans admit they don’t always pay bills on time, it’s not surprising that many of us feel like we’re constantly picking up the cards and starting over.
If you’ve made mistakes with borrowing or repayment in the past and need to do some DIY credit repair, here’s what you should know to get started.
Should I just hire one of those credit repair services?
When you start researching credit repair, you’ll come across companies that promise to fix your credit if you pay them a small upfront fee.
Some of these companies are actually scammers who will ask for personal information like your Social Security number, address, and other identifying details and use it to open new accounts in your name.
Other credit repair companies may not steal your information, but instead promise things they can’t achieve, like raising your credit score by 100 points. No company can permanently remove adverse records on your credit report unless they’re mistakes, so any operation offering this service is just looking to make a quick buck off the financially uninformed.
If you’re being contacted by one of these companies, proceed with extreme skepticism. There’s nothing a paid service can do that you can’t do yourself for free.
How do I find my credit score?
Finding your free credit score is fairly simple. Banks like Capital One, Chase, and Discover let people view their credit scores for free, even if you’re not a customer. Sites like Credit Karma or apps like Mint will also show your credit score.
Some sites try to sell you credit score monitoring services, but these aren’t necessary. It’s easy to check your score for free once a week or once a month through one of the services mentioned above.
If you check your credit score from several different sites, you’re likely to see a variety of scores. This is because credit score sites can use different scoring models, resulting in varying figures. Don’t worry if one site shows a 730 score and another has a 740 – as long as one score isn’t drastically different, you can rest easy.
How do I read a credit report?
Your credit report is like a financial report card, while your credit score is like your GPA. It’s one number that lenders can use to approve or deny you for a loan or credit card. The credit report shows a history of your credit activity.
You can find your credit report for free at AnnualCreditReport.com, which compiles credit reports from the three credit bureaus: Equifax, Experian, and TransUnion. Normally, you can only view these for free once a year, but due to the Covid-19 pandemic you can check them for free once a week until April 2021.
When you view your credit report, it will show your current and past loans, lines of credit, and credit cards. It will also show if a payment was made on time, if there were any defaults or collections, and other significant issues.
Some lenders don’t report activity to all three credit bureaus, which is why you may see a discrepancy between the different credit reports. Each credit report should have a legend that explains different marks, such as a red X for late payments or a green X for on-time payments.
How do I dispute any errors?
According to the Federal Trade Commission, one in five people have errors on their credit report.
If you see an error, the first step is to dispute it with the credit bureau directly. It may take a few weeks for this to be resolved, and you should log into your account to check on the status of the dispute. Don’t assume this will get resolved on its own.
If you suspect that this instance is a result of identity theft, it may be a good idea to freeze your credit. Freezing your credit means you won’t be able to open any new credit cards or take out new loans. It also stops anyone from opening a new account in your name.
It’s free to freeze your credit report, and it’s also free to thaw it later once you’re ready to apply for a new line of credit.
How do I fix my credit mistakes?
It’s possible to fix a low credit score, no matter how bad it is. First, you’ll have to adopt some good credit habits. Start by paying all your bills on time, which makes up 35% of your credit score. If it’s hard to remember the due dates, create calendar reminders on your phone or computer.
Another strategy is to set up automatic payments for all your bills. This will ensure that your bills are paid on time, as long as there’s enough money in your bank account.
After you set up autopay, it may take at least one billing cycle before it kicks in. Make sure to log in to verify that the payment went through correctly.
You should also avoid opening new accounts, as this will lower the average credit age on your credit report, which makes up 15% of your credit score.
How do I lower my credit utilization?
Credit utilization makes up 30% of your credit score, and refers to how much of your available credit line is being used. Ideally, you should have a credit utilization measure below 10%, and anything above 30% will significantly decrease your credit score.
Calculating credit utilization is simple. Just divide your current credit balance by the available credit. If you have a $500 total balance on your credit cards and $2,000 of available credit, for instance, you have a 25% credit utilization percentage.
Credit bureaus look at your overall utilization, which factors in all your credit accounts and individual utilization ratios for each credit card. To improve your utilization, start by paying down the balances on the credit cards with the highest individual utilization. If you have a credit card with 25% utilization and one with 90% utilization, pay down the latter card first.
Improving your credit is a long-term process
Even though it’s possible to fix your credit score, it may take months or years to rebuild your credit- but it’s definitely worth it. Improving your credit score will make it easier to qualify for other loans, credit cards, and even an apartment.
The good news is that the habits you need to build a good credit score will also improve your overall finances. Paying your bills in full every month will keep you from overspending, and paying on time will save you money on late fees and interest charges.
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