Often times, you find out about your bad credit at the worst possible time. Such rude shocks are normally an unpleasant surprise. You apply for a credit card or a small loan, and the financial institution turns you down citing bad credit. It can be frustrating because you may be in a situation where you really need to purchase a new car via an auto loan.
Why my report looks so bad?
When faced with this kind of a situation, the first natural question on your mind would be “why is my credit report bad” or “what item within my credit report is making my record bad”. So, you order your copy of credit report from either of the three biggest credit bureaus in the nation, Experian, Equifax, and TransUnion. As you go through the various items on your credit report, you might notice that most of the times, the bad credit occurs due to a few items on the credit report. At times, you may not fully understand what all the items on the report mean. You would have to do some research in order to really understand what each item on a credit report is and how it impacts your credit score.
What are the main entries in my credit report?
History of making timely payments is a big part of any credit report. It essentially tracks how regularly and promptly you pay your monthly bills. Whether it is credit card bills or cell phone bills, are you paying them on time and in full amount? This component of payment history affects roughly 35% of your final credit score. It is a significant factor worth paying attention to.
Next, the total debt held by you is a big factor. It accounts for almost 30% of your credit report. It measures what kind of debts you have and more importantly what amount. Credit card debt, education loan, auto loan, payday loan, etc. are all factored in. If you are close to the maximum borrowing limit on your credit card, then that is also a negative sign as far as credit score impact is concerned. The mix of debt is also critical when it comes to credit reports. Credit card debt and payday loans are not viewed as favorably as an education loan or a loan backed with a real asset.
The credit report also takes into account the timeline and longevity of your financial history. The longer you have a history, the better it is for your credit score. Use a credit card occasionally just to build up some financial history. Make monthly payments to get that data on record.
Lastly, whenever a credit report is sought for sanctioning of any loan, you lose points. So, do not regularly keep applying for new credit cards, or new loans. If you are going to do it, then make all the applications within the span of a couple of weeks. That way, you will lose points only once. If you keep doing it every few months or so, then every inquiry will result in a loss of points. Seeking regular loans is a negative factor for the credit score.
Specific situations that will negatively impact your credit score
- Foreclosure – Not being able to make the EMI on your home loan can lead to a foreclosure. It is also a long-term negative event for a credit report. You will have to work hard and patiently to recover from this hit.
- A lawsuit judgment – A judgment in a finance-related case, like debt recovery, can affect your credit score negatively for a few years.
- Repossession – Repossession does not end when the asset involved has been repossessed. You still owe the outstanding debt and are vulnerable to the negative impacts arising out of that unpaid debt.
- Tax Lien – Unpaid tax liens are a serious negative on credit reports. They can be on your report for up to 7 years after you have paid off the tax amounts.
- Late Payment – Outstanding payments over 30 days can show up on credit reports. Sometimes, you eventually catch up and pay everything that is outstanding, but that does not take away the initial notification of late payment. You could be looking at up to 7 years of the late payment item showing up on your credit report even after all the payments have been settled.
- Charge-Off – A charge-off happens when a lender deems a debt non-recoverable. The lender simply writes the debt off its books and sells the non-performing loan to a debt collector. Once that happens, you will face an aggressive recovery effort and a hit to your credit score.
How to fix discrepancies?
Now that you have a good idea of what items to watch out for in your credit report, the next step is to try and identify any discrepancies on your report. The first thing to watch out for is personal information. Is your name on the report, are all items related to you, or are they someone else’s records and transactions? Sometimes, a fraudulent account may have been opened in your name. That could be affecting your credit score. Flag such items immediately. Examine credit lines to identify such unknown fraudulent accounts. Check all other transactions to see if any late payments are present. As outlined above, late payments are a major cause for bad credit. You must carry out this audit on credit reports of all the three major credit bureaus. This is important because one credit agency may have missed something which the other has not. Some amount of time and effort is required, but you can do the above steps yourself without going to any professional expert. However, if you are feeling overwhelmed and see the need to approach professional help, Dedebt has a team of experts who can guide you with credit repairing. Feel free to fill out the form below or call us for more details.
If you do find inaccuracies or discrepancies in your credit report, then bring them up with the credit bureaus. Do not wait thinking that those items will go away in a few years and everything will be fine. Thousands of normal average people successfully dispute discrepancies on their credit reports every day. All you need to do after identifying the inaccuracy is to write a letter to the credit bureau.
How to write letters to credit bureaus
There are few things that you should know before you begin writing a certified letter to credit bureaus. By following certain guidelines, you can make sure that your letter will improve the success rate of getting your credit report fixed. Below are some tips that will help you write strong and professional credit repair letters:
- Always make sure that you include your name, contact information, and accurate address. That allows the bureau to respond to you effectively and it is a good practice from a legal point of view as well.
- Use a neutral and professional tone and resist getting carried away with emotions. You can point out the fact that a loan is completely non-existent, or that a loan amount is not accurate. Point out exactly what the discrepancy is and let the bureau give you proof of why they put the disputed item on your credit report.
- It might be a good idea to hand-write the letter yourself. It shows that you are a real person and that a real person is disputing the items on the credit report. Credit bureaus read hundreds of credit repair letters every day and they know when something is copy-pasted. So, if you hand-write your letter, they will know that someone has put in the effort and time in writing original genuine content.
- List the reasons (perhaps with photocopies) as to why you are disputing an item. Providing documentation and proof is not an absolute must because the burden of proof is on the credit bureau. Once you dispute something, they are required by law to carry out an investigation and provide you with proof of accuracy. If you are providing documents, then never send the original copy to them. Always send the photocopy and keep the original with you. You might need it in case of a legal proceeding in the future.
- Mail the letter with a return receipt option. Keep the return receipt for future use, in case if it is required in a lawsuit.
Credit repair without professional help
Besides writing a credit repair request letter, there are some things that you can do to repair your credit. You can do these things yourself and you may not need any professional help. You can do the following:
- Request for a limit increase on your credit card – If you notice that your spending is approaching the maximum credit limit on the card, request for a limit increase. It is important that you spend much less than the maximum limit because being too close to the limit affects your credit score negatively.
- Reduce spending on cards close to the maximum limit – A good ratio of spend to maximum limit will improve your credit score. Choose credit cards which are closer to the maximum limit and reduce spending only on those cards.
- Consolidate your credit card debt – Installment loans are viewed more favorably than credit card debt. So, try and consolidate all your loans into a single personal loan. Sometimes, you may even have to pay a lower installment on the consolidated loan than the sum of individual installments that you have been paying all along.
- Get a credit builder loan – Certain credit unions and smaller banks offer what is called a credit builder loan. This is a loan which sits in an account under your name. However, you cannot use this loan. You have to pay EMIs on the loan. Once all the EMIs have been paid, you can use the final accumulated amount. This kind of loan may seem unhelpful, but it can help improve your credit score.
Some other things to keep in mind:
If you are going to pay off any outstanding loan, get a written statement from the lender or collection agency. Otherwise, they can simply deny that you have made the re-payment even when you have.
If you settle with a lender for an amount lower than the original amount of the debt, the difference between the two is treated as income, and that may affect your income taxes. Consult your accountant or tax expert to understand the implications.
Dedebt has a team of professionals who have experience in repairing credit for consumers across the country. Feel free to call us or fill out the form below to know more about how you can get your credit repaired.