If you’re like a lot of Americans, your credit score might be lower than average, and your debt might be higher than what you’d like.
A bad credit report or a low credit score can make your financial life difficult and more expensive in many ways.
By Colin Nass, CFP®, AEP®, RICP®
You might be aware that a low credit score affects your ability to borrow money, but did you know:
- Individuals with bad credit are charged higher interest rates for loans and credit cards.
- Insurance companies check credit scores and often charge drivers with poor credit higher premiums.
- Landlords check credit histories when making rental decisions.
- Utility companies check your credit to determine whether a security deposit is required.
- Some employers check your credit before extending a job offer.
All of these are reasons to take action to repair your credit sooner rather than later.
Poor credit can be an even larger 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 repair it as soon as possible. We’ve all seen or heard advertisements for credit repair, but you don’t need to spend additional money on these services. There’s nothing that a credit repair company can do to improve your credit that you can’t do yourself.
Take these steps to repair your credit:
Step #1: Request current copies of your credit report
You’ll need to review your credit report to determine what negative items are affecting your credit score. To obtain 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’s a good idea to order all three credit reports because some creditors and lenders might only report to one of the credit bureaus. Because credit bureaus don’t typically share information, it’s 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.
Step #2: Review your credit reports for errors
Read through your credit reports thoroughly. There’s a lot of information included, especially if you have a long credit history. They each contain your personal identifying information, detailed history for each of your accounts, any items that might have been listed in public record (such as a bankruptcy, for example) and the credit inquiries others have made to your credit report.
Step #3: Decide what you need to repair
Here are some types of information to consider:
- Incorrect information, including accounts that aren’t yours, payments that have been incorrectly reported late, etc.
- Past due accounts that are late, charged off (more than 180 days delinquent) or sent to collections.
- Maxed-out accounts that are over the credit limit.
Dispute errors. Once you’ve reviewed your credit reports, you have the right to dispute any information that’s inaccurate, incomplete, or you believe can’t be verified. Credit reports come with instructions on how to dispute information online, but you can also file disputes by phone or mail.
Filing your dispute online or by phone might be the fastest and easiest method, but you’re left without a paper trail. Using certified mail is perhaps the most secure method since you’ll have proof of the mailing date. This is important because credit bureaus have 30 to 45 days to investigate and respond to your dispute.
Include a copy of your credit report with your dispute and copies of any supporting documentation. You can also send your dispute directly to the bank or creditor that listed the information on your credit report. They’re under 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 you disputed the information. You’ll have an opportunity to add 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: Bring past due accounts up to date
Once you deal with any errors on your credit report, concentrate on your payment history. It impacts 35% of your score. So, multiple past due accounts on your credit report will significantly hurt your credit score. Aim for any past due accounts to be reported as “current” or at least “paid.”
Make payments on accounts that are past due but not yet charged off to bring them current.
When you pay a charge-off in full, your credit report will be updated to show the account balance as $0 and the account as paid. The charge-off status will remain on your credit report for seven years.
Address any 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’re paid.
Step #5: Pay down high account balances to below your credit limit
Your credit utilization, the ratio of the amount of revolving credit you’re using compared to your credit limit, makes up 30% of your score. Maxed-out credit card balances decrease your credit score and add costly over-the-limit-fees. Ideally, credit card balances should be below 30% of your credit limit.
Most of us will have a limited amount of money in our budgets to put toward credit repair each month. So, you need to prioritize.
First, focus on accounts that are in danger of becoming past due. Bring as many accounts to current status as possible.
Next, work on paying down credit card balances and eventually paying them off.
Third, address accounts that have already been charged-off or sent to collection.
Once you’ve done this, making timely payments and keeping your balances below the credit limits will help your credit score and add positive information to your credit report.
Don’t be discouraged by setbacks. Your credit score might drop as you go through the credit repair process, but this doesn’t mean you’ve done something wrong. Continue adding positive information to your credit report and your credit score will increase over time.
Colin Nass, CFP®, AEP®, RICP® is the Senior Manager, Financial Planning at MMBB Financial Services. He uses his 20+ years of financial planning and investment experience to assist members in achieving financial goals.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational / educational purposes only.