Q: I make pretty good money, but my credit score is low. Whatís the fastest way to raise my score? Iíve looked for help through credit repair places, but I havenít decided whether theyíre right for me. I have paid off two credit cards and one jewelry account in the past 14 days. Can you help?
A: Yes, I can help. Itís good that youíre thinking carefully about using a credit repair service. In many cases, youíre paying a company to do things that you can do yourself. Plus, many of these companies are disreputable. Theyíll take your money, further damage your credit and then disappear. You can fix credit yourself with some patience and a little guidance.
Hereís some background to help demystify the process. Your credit score uses historical data from your credit report to predict your future risk of default. The information on your credit report is usually an accurate reflection of your financial life. And finally, your financial life is a subset of the rest of your life. So if youíre having tough times, more than likely it will show up in your financial life, credit report and then credit score.
You have a low score, so Iím going to guess you have some charged-off, unpaid and/or seriously delinquent accounts on your credit report. The damage to your credit score has already occurred. What you can do first is make sure the negatives reported on your credit file are accurate and not out of date. Review your credit reports, and dispute any negative items that you donít think are yours or are more than 7 years old. Once you have made sure your history is accurate, you can work on adding new, positive data.
A good next step is to pay any remaining past-due accounts that have not yet been charged off. Doing so will bring the accounts current. The accounts will begin to generate positive account data on your credit report again. The negative late pays will still appear on your credit report, but they will soon be outweighed by positive data.
Next, pay the balances due on any collection or charged-off accounts. Paying what you owe will not immediately make a significant improvement in your credit score, but anyone considering granting you a loan or new credit will want to see that you did pay what you owed, even if it was late. Finally, pay down balances on your open credit card accounts to between 30 percent and 50 percent of your credit limit. Better yet, pay them off in full, and pay them in full each month thereafter. Low balances relative to your limit will add points to your score.
That takes care of your existing credit accounts. To help build positive credit history, you might consider opening new credit accounts in various categories. Showing that you can handle fixed payments as well as credit cards is a plus. An installment loan for furniture, a car or a personal loan will round out your credit profile. You might also consider a secured credit card (be sure the issuer reports to the major credit bureaus) if you do not qualify for other types of new credit. Lastly, apply for credit only if you need it and if you can afford new payments.
My bottom line on credit repair offers is that they are too risky and expensive, especially when you can do it yourself for free.