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Repairing Your Credit Rating
Sometimes, due to layoffs, business failures, miscalculations or even fraud, some people's credit ratings can fall. They may miss payments, the major credit rating agencies take note of this, and it goes on their records -- typically for seven years.
The net effect is to lower their FICO credit scores. This is a combination of 49 individual ratings to form a simple score from 300 to 850. Banks and credit agencies generally use it to decide if you are worthy of a loan -- and what interest rate you'll pay. People with higher scores pay lower rates and get quicker approvals, so scores are important.
Verify Your Credit Rating
The first thing a borrower would want to do upon learning they have a "credit problem," or lower score, is to check it out for oneself. There are a number of services available to provide you with credit reports at little or no charge, and you can write to the three major credit agencies once a year to get a credit report under U.S. law. Checking your credit rating actually lowers it slightly, so you don't want to check too often.
Your first concern is to make sure that your credit is accurate. Mistakes happen. Sometimes you pay a bill and the wrong account is credited. There may be negative reports on your credit card that may not belong there, hurting your score.
Pros and Cons of Credit Fixing Agencies
Many people pay a service to fix their credit report by encouraging companies to remove their negative reports by contesting them. But these systems often charge very high fees and make huge claims to their effectiveness that may not be borne out by reality, according to the U.S. government.
There are times when these services do make sense, particularly if you are looking to make a very major investment, like trying to close on a million-dollar home. Your interest rate could have serious impact on your cash flow -- thus justifying extraordinary means to fix your score -- but select a vendor carefully.
Do-It-Yourself Credit Fixes
Essentially, when it comes to fixing bad credit, you hold the power to help yourself, but it takes time, effort and patience. Once you identify a mistake on your credit report, you should call the company you allegedly owe, and try to straighten things out.
Typically these will not be satisfied with one call. You will likely have to mail them documents supporting your case, showing either that you are not the person who incurred the debt, or that you have made the payment in question. It is important to have dated copies of all correspondence in a file in case you need to refer back to them later.
Most companies are reasonable if presented with proof that an error has been made; however, there are times when legal assistance becomes necessary. This need and your cost varies by the complexity of the case, severity of the error and amount of money at stake.
Getting Back On The Road To Good Credit
In addition to physically correcting mistakes on your financial records, you may badly need to clean up your act financially. Here a bankruptcy attorney may be able to help you restructure your debt and protect yourself from creditors, and retired accountants in your area may be willing to advise you as you work to negotiate on your own with individual vendors to whom you owe money. Be cautious of debt consolidation companies, as not all have your (best) interests in mind.
Many vendors will allow you to make small payments over a longer period of time. Some, notably hospitals, may have special programs for those who cannot afford to pay their bills, but you have to apply to these and follow through on your agreements.
The easiest way to improve your credit rating is to start paying your bills on time. In fact, opening one credit card, using it, and paying it on time EVERY MONTH is a great way to re-establish credit. Of course, building up a new pile of debt is a big mistake.
Essentially you want to start making your payments on time, and you want to lower your credit card debt substantially by making regular payments over time. Some say to pay down the credit card with the highest interest rate first to save the most money. Alternately, if you pay off the card with the smallest balance first, you will remove one monthly minimum payment as soon as possible. Do the math yourself and see what saves you the most money.
Feel free to cut up credit cards so you won't be tempted to use them (be sure you won't need it). However, don't close the credit card account because that too lowers your score. The length of time you hold a card is used to calculate your score, so keep the account.