Posted by: John S Kiernan

Credit scores have many enemies — from late payments and collections accounts to tax liens and court judgments. Each takes a toll on your credit standing to varying degrees. And the damage unfortunately comes far faster than any resulting recovery.

There is no such thing as a quick fix to serious credit-score problems, you see. There are only four legitimate ways to fix or repair your credit, and they’re all free.

We’ll explain each of the four pillars of credit repair in detail below. Just remember, each step on its own will not be enough to completely fix your credit. Credit repair, after all, is like peeling an onion: You have to peel away a few layers before you get to the good stuff. But we’ll try our best to make sure your credit recovery doesn’t bring you to tears.

Step 1: Dispute Credit-Report Inaccuracies

Roughly one in five people have an error on one of their credit reports, according to the Federal Trade Commission. And the wrong error could knock you into a lower credit tier, forcing you to accept less attractive financial products and generally spend more than necessary.

So parsing all three of your major reports and disputing any mistakes that you find could produce fairly immediate credit-score gains. The best part is that disputing credit report errors is easy enough for anyone to do on his or her own.

Get Your Credit Report - 100% Free

If you’re not comfortable navigating the credit-repair process on your own, you can seek help from a nonprofit credit counselor or a select few for-profit companies. Lexington Law is among the for-profit consultancies that have successfully helped people remove negative items from their credit reports.

Basically, the trick is to aggressively dispute negative records, especially older ones, and force the source of that information (otherwise known as “data furnishers”) to produce verifying documentation. A lot of times, the so-called data furnishers can’t, which obligates them to stop reporting the negative item to the credit bureaus and thus removed from the consumer’s file.

Negative records that you cannot successfully dispute will remain on your credit reports for roughly seven to 10 years. The best way to overcome such negatives is to add a pile of new positive information to your credit reports. Doing so dilutes the negative information and shows that you’re really a responsible borrower who just made a few mistakes. We’ll explain how to go about doing that in the steps below.

Step 2: Piggyback on Excellent Credit as an Authorized User

If one of your family members has good or excellent credit, ask to become an authorized user on one of their credit reports. As an authorized user, your relative’s account will be added to your credit reports. And as on-time payments are made, the resulting positive information will help to lessen the impact of your past mistakes. That will lead to credit-score improvement.

In other words, you can basically hitch a ride to better credit.

Plus, it’s worth noting that authorized users can’t be held responsible for missed due dates or other misuse of the account. So if your relative screws up, you can simply ask the credit bureaus reporting the information to scrub the records from your file.

As a result, there is very little downside to being an authorized user. And there’s a lot of upside potential, considering that it’s possible to build excellent credit with authorized use alone.

Step 3: Satisfy Collections Accounts & Delinquencies

The newest credit-scoring models stop considering collection accounts once they’ve been paid. In other words, figuring out a way to repay what you owe — or negotiating a deal with your creditor — can produce immediate credit-score benefits if you have a collection account, medical or otherwise, on your file.

This alone probably won’t repair your credit completely. But every layer of negative information that you can strip from your credit report will improve your credit score.

Similarly, catching up on payments for a delinquent account won’t repair your credit. But it will prevent the damage from worsening. More specifically, finding a way to change the status of a delinquent account from “past due” to “paid” or “settled” will stop the bleeding and allow you to proceed with your repair efforts.

Step 4: Reduce the Amount of Credit You Use

Credit utilization is the ratio of your account balance to your spending limit. It basically indicates whether you are using too much credit, which, for the purpose of maintaining good or excellent credit, is generally above 30% of what’s available. The ratio is calculated for each of your credit cards individually as well as for all of them collectively. The lower your credit utilization ratio(s), the better it generally is for your overall credit score.

Check Your Credit Utilization for Free

So how do you improve your credit utilization in the name of short-term credit-score gains? The easiest way is to pay early and often.

Paying your outstanding balance a few days after you receive your paycheck, rather than waiting until your due date, will help minimize the balance that’s reported to the credit bureaus and used to calculate your credit utilization. This can work both with multiple monthly payments or a carefully timed single payment. Automating withdrawals from a bank account is a great way to enforce the plan and eliminate forgetfulness.

Extra Credit: Monitor & Perfect

Keep a close eye on your credit score throughout the repair process, as its daily changes will serve as an indication of your progress. You can do so for free on WalletHub, the only site with free daily credit-score updates. We’ll also analyze your latest credit score to identify weaknesses and tell you how to improve.

Get Your Latest Credit Score – 100% Free

For more information, check out WalletHub’s top tips for everyday credit improvement. And if you’re dealing with really significant damage, you might also want to check out our guide on how to rebuild your credit completely.

Ask the Experts: Getting a Fix on Fixing Credit

Fixing damaged credit can be a very daunting task. So we called in reinforcements. We posed the following credit-repair questions to a panel of personal finance experts. You can see who they are and what they had to say, below.

• What is the biggest mistake that people make when trying to fix damaged credit?
• When you have damaged credit, does it ever make sense to pay for help fixing it?
• Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation?
• What is the best tip you have for someone trying to fix their credit?

< >

• Coleen Pantalone Associate Professor of Finance at the D’Amore-McKim School of Business at Northeastern University
• Kristy L. Archuleta Editor of the Journal of Financial Therapy and Associate Professor in the Personal Financial Planning Program in the School of Family Studies and Human Services at Kansas State University
• Amanda Falk Graduate Assistant in the Literacy in Financial Education (LIFE) Center at Eastern Illinois University
• Karin Ford-Torres Associate Professor of Accounting and Finance in the School of Business at American Public University System
• Milos Vulanovic Associate Professor of Finance at the EDHEC Business School
• Pawan Jain Assistant Professor of Finance in the College of Business at the University of Wyoming
• Jennifer Weske Associate Professor of Accounting & Finance and Director of the Master of Accountancy Program in the School of Business at Christian Brothers University
• Steve Pilloff Associate Professor, School of Business, George Mason University

Coleen Pantalone Associate Professor of Finance at the D’Amore-McKim School of Business at Northeastern University What is the biggest mistake that people make when trying to fix damaged credit? The biggest mistake that people make is to wait. Fixing damaged credit is hard work and it takes time and commitment. Because it can feel overwhelming, there is a tendency to put your head in the sand and hope it will just go away. It doesn’t. So, get your budget under control, cut up credit cards, and begin to chip away at the debt. At the same time, talk to your creditors. If you can, work out a payment plan with each of them. But make sure you can do what you promise. When you have damaged credit, does it ever make sense to pay for help fixing it? There are free resources that can help you address your credit problems -- developing and sticking to a budget, negotiating with creditors, and starting the process of paying off debt. Churches and community agencies are good starting places for help. Paying for help is tricky. There are plenty of unscrupulous people out there offering to help you fix your problem for a fee. As with anything, if it sounds too good to be true, it probably is. There is no magic bullet for fixing a credit problem. So, look for the free resources in your town. Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation? It might help, but the time and energy is probably better spent addressing the underlying problem -- that you have too much debt. What is the best tip you have for someone trying to fix their credit? The most important tip is “don’t wait -- start now.” Credit problems don’t go away, and they don’t fix themselves. Kristy L. Archuleta Editor of the Journal of Financial Therapy and Associate Professor in the Personal Financial Planning Program in the School of Family Studies and Human Services at Kansas State University What is the biggest mistake that people make when trying to fix damaged credit? They pay too much to fix credit that they could have fixed on their own because they do not know that they can do much of what a professional can do. If a professional is needed, seek out services from a not-for-profit agency that is accredited by National Foundation of Credit Counseling. Another good idea would be to look for a professional who is an Accredited Financial Counselor(R). When you have damaged credit, does it ever make sense to pay for help fixing it? It may, if you seek the right resources. This can be an overwhelming process and a trained professional, who works in your best interest and not on commission or by selling a product to fix the problem, may be the best solution. What is the best tip you have for someone trying to fix their credit? Credit has become an important aspect of our lives and communicates a story about ourselves. Improving credit or fixing credit is important in many aspects, whether it is setting up utilities, renting a home, purchasing a home or obtaining a job. If your credit is in need of repair, know that you are not alone. Don't be afraid to seek help when things become overwhelming. There are qualified financial professionals who trained to help, and who will work in your best interest. Amanda Falk Graduate Assistant in the Literacy in Financial Education (LIFE) Center at Eastern Illinois University What mistake is the biggest mistake that people make when trying to fix damaged credit? The biggest mistake people tend to make is closing credit card accounts -- especially at a point where you may have just finished paying off very large balances. A credit card account with no delinquency stays on your credit report for 10 years after it is closed. After 10 years, closed accounts drop off your credit report and all the positive history on the account is lost, which can negatively impact the credit score and reduce the length of credit history. Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation? Disputing accurate negative records usually proves to be a waste of time. However, where you recognize the record(s) to be inaccurate and you have documentation to support it being inaccurate, it is worth disputing. What is the best tip you have for someone trying to fix their credit? If after paying off debt you wish to close accounts, start with store cards (department stores, DIY stores, etc.), as they tend to have higher interest rates and fees. Avoid closing the account(s) you’ve had the longest that might have the lowest interest rates. Instead, ask those companies what their guidelines are for an increase in credit limit. Karin Ford-Torres Associate Professor of Accounting and Finance in the School of Business at American Public University System

What is the biggest mistake that people make when trying to fix damaged credit?

People want to be able to repair damaged credit right away. With patience and due diligence, it can be repaired over time. Repairing credit can be accomplished by gathering information and creating a strategy. The challenge is not to wait until it is too late, because it can become costly. It is essential to assess the overall situation, such as how much debt is owed, how late are the payments, is disposable income limited? From an emotional perspective, people might think that there is no way out or that it has become too overwhelming. Depending on the situation, fixing damaged credit can be done by the individual. However, there are some who might benefit from the services of a credit repair agency. They can assist with a repayment system, be the liaison with the creditor, help with credit reports, etc. Whatever the case may be, there are options in fixing damaged credit

.

When you have damaged credit, does it ever make sense to pay for help fixing it?

It depends on the severity of the situation. Repairing damaged credit is a doable process that can be done independently. An important mindset is to be organized, realistic, and follow the plan. A credit report should be obtained first to review accuracy and correct any errors. Determine how much income is left after paying household expenses, such as mortgage/rent, car loan, utilities, etc. Then, make a list of each credit card, minimum monthly payment, and total balance to help visualize how much is owed individually, and total debt. To begin the repayment process, the credit card with the lowest balance should be selected to be paid off first. Make minimum payments on the remainder of the debt, with any excess towards the first selected debt.

Once the first debt is paid, then make the second debt on the list, the first one. Make the minimum payments on the other debt, with the excess to the first one. This will help to eliminate the debt much quicker instead of trying to pay them all at once. Of course, making payments by the due date will also make a difference in adhering to the plan and help fix credit. There are some situations that may need the assistance of a credit repair company. It depends on the severity of the situation. Nothing is ever lost in gaining knowledge and information. Contacting a company to find out about the process, the benefits, and cost will help make a decision that will help fix credit.

There are other situations in which there is no outstanding debt, but just simply bad credit. Obtaining a secured credit card is one way to begin repairing credit. Some secured credit card companies can assist with low deposits. The credit limit will be based on the deposit or the guidelines established by the creditor. The most critical part will be to maintain a balance of 30 percent or less of the credit limit, and make monthly payments on time. Regardless, the monthly reporting of the credit card balance and on-time payment will make a positive mark on the credit report. While the good credit is getting reported, the bad one becomes part of a distant past.

Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation?

It makes sense to look into any negative records. Sometimes it is the way a company reports credit that can cause inaccuracy. If the company providing the data does not have the necessary documentation to support the reported information, then is there any recourse to validate what is being reported? Of course, if the individual knows there is accuracy on what is being reported, then move on to what it is not. At the end of the day, it is doing the right thing. Trying to beat a system can come back to hurt in other ways when it is least expected.

Milos Vulanovic Associate Professor of Finance at the EDHEC Business School

What is the biggest mistake that people make when trying to fix damaged credit?

People with damaged credit are the people with income constraints and for many, it is difficult to establish the best strategy to fix the credit. They need to carefully plan the maximum amount they could pay on a monthly basis, and to pay the debts with the highest APRs.

That being said, they should probably be more proactive in contacting original creditor, and see all the opportunities. Therefore, the biggest mistake is probably acting on fixing your credit without full information.

When you have damaged credit, does it ever make sense to pay for help fixing it?

It depends. Intermediaries are specialized and may offer good solutions, but an individual with bad credit should carefully weigh all pluses and minuses.

Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation?

Yes. That is one of the tools not enough used on consumers’ behalf.

What is the best tip you have for someone trying to fix their credit?

Be persistent and try to negotiate with every creditor.

Pawan Jain Assistant Professor of Finance in the College of Business at the University of Wyoming

What is the biggest mistake that people make when trying to fix damaged credit?

I believe the biggest mistake that people make is not carefully reviewing the credit reports. A careful analysis of the reports can help identify the key issues, which can provide guidance for the course of action.

When you have damaged credit, does it ever make sense to pay for help fixing it?

Once an individual is placed in a high-risk group, it is difficult to get approved for any loans and credit cards. This would further lower the credit score due to zero or low credit usage on the record. So, if an individual cannot get approved for the unsecured credit cards with no annual fees, it might be worthwhile to apply for credit cards with annual fee or the ones that require a collateral.

Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation?

It does not make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation. However, if the negative record is due to error, then consumers must dispute the error. If the negative record is more than seven years old, then the consumer can contact the credit bureau to get it removed from his/her records.

What is the best tip you have for someone trying to fix their credit?

The first step towards improving the credit score is to know why it is low in the first place. To do that, one can ask for copies of the credit reports from the various rating agencies. Check for any errors and look for the reasons driving the credit score. Start paying down the unpaid debts. Apply for credit cards and make timely payments to create a positive history.

Jennifer Weske Associate Professor of Accounting & Finance and Director of the Master of Accountancy Program in the School of Business at Christian Brothers University

What is the biggest mistake that people make when trying to fix damaged credit?

Other than doing nothing, I think the biggest mistake is immediately calling a “credit repair” company. The advertisements indicate that individuals do not have to pay for their debt. This is not correct. In fact, most research indicates that the credit repair companies are ineffective for the most part. When you purchase an item, it will always be your responsibility to pay for the item. To work on your credit, always start by contacting your lenders directly. Talk with the company customer service employees to work out a payment plan. Oftentimes, if you present a plan that indicates what you make, what your bills are and what you can afford in payments, the lenders will work with you. They need you to pay your bills because when you do not, they have to pay for it. This in turn is paid for through higher fees and interest rates to all consumers. Thus, if you are organized and create a budget, you will find most lenders will work with you.

When you have damaged credit, does it ever make sense to pay for help fixing it?

At times, it may be necessary to hire an attorney to help. However, using a credit repair company does not make sense. You need to use that money to pay your debt. Lenders prefer to hear from the consumer.

Does it make sense for consumers to dispute accurate negative records on their credit report, in the hopes that the data furnisher won’t have the necessary documentation?

It always makes sense to dispute negative records if they are incorrect. Never dispute records that are accurate or that you cannot prove as incorrect. Furthermore, never start disputing everything on your report. You will be ignored and put in the category of “desperate,” and it could end up hurting you. If you need help, look for a non-profit company or an attorney who specializes in credit. Be very careful regarding who you select and the money you pay.

What is the best tip you have for someone trying to fix their credit?

The best tip I can give is to take a careful look at your budget. Write down all of the money going in and all of the money going out. If more is going out than in, then you need to make the hard decisions. Remember that a cell phone is a luxury. People lived without these for years and survived just fine. Get rid of all luxuries, and then start whittling down the necessary charges. For example, eliminate all eating out at restaurants, all beauty services except for an inexpensive haircut if necessary, all television packages, etc.

Next, look at other items you deem as necessities, and work to cut those costs. You need to have the bare minimum Internet service if you do not have the ability to use the Internet at the library or local community colleges. Television is never necessary, since the radio is free. Make detailed grocery lists before heading to the store, clip coupons and ensure you are getting the best prices. Cut out expensive groceries and rely on the inexpensive staples, such as rice, oatmeal, noodles, etc.

Next, look at your rent or house payment. Identify whether or not you can move to a less expensive dwelling. Remember that children can share rooms. Be sure you include money for expenses, such as oil changes and gas for your car. In addition, you need to set aside a small amount each month for larger expenses that occur less often, such as new tires or even medical care. Once you have your detailed budget, identify what you can pay each of your debtors. Then, contact each one with your budget and a proposed payment. Ask for reduced or no interest, and no penalties if you pay the agreed upon amount on time each month. Always pay on time. Pay as much as you can, and work to pay the full balance every month. If you need to build credit and you have a low credit score, try a secured credit card to build your credit. It will take years, but it will feel good and you will develop excellent habits to have excellent credit.

Steve Pilloff Associate Professor, School of Business, George Mason University

What is the biggest mistake that people make when trying to fix damaged credit?

I think a big mistake people make when trying to fix damaged credit is thinking that the goal is simply to repair current problems, not to make fundamental changes to avoid future problems. It's analogous to losing weight. If you just focus on losing weight and view your job as complete once you've hit your goal weight, then you're at risk or gaining everything back. However, if you view losing weight as part of the process followed by adopting healthier eating habits, you can maintain your healthy weight for a lifetime.

When you have damaged credit, does it ever make sense to pay for help fixing it?

It absolutely makes sense to pay for help fixing damaged credit. If you had a medical problem like a broken arm, you wouldn't think twice about paying a qualified doctor to help fix it. Similarly, paying a qualified debt counselor to help manage and restructure your obligations could help you repair your damaged credit.

What is the best tip you have for someone trying to fix their credit?

Remember that the goal isn't just to repair current problems, but to then avoid new, future problems. It's analogous to losing weight. If you just focus on losing weight and view your job as complete once you've hit your goal weight, then you're at risk or gaining everything back. However, if you view losing weight as part of the process followed by adopting healthier eating habits, you can maintain your healthy weight for a lifetime.

 

Image: IconicBestiary / iStock.

from Wallet HubWallet Hub


via Finance Xpress