Blemishes on your credit report can cost you, but don't despair. It's never too late to become credit worthy. You just need to get started, using our five steps for improving your credit rating, and remember that results won't happen overnight.
1. Order you credit reports
Find out what the top three credit bureaus (Equifax, TransUnion and Experian) are saying about you. And remember that your information on file is likely to be at least slightly different at each one. Since credit reporting is voluntary, creditors aren't required to report to all three bureaus, but most large national lenders do. However, smaller lenders will typically report only to the one to which they also subscribe for pulling reports. Therefore, it is preferable to order a three-bureau, merged credit report or all three individually from www.annualcreditreport.com. Credit reports should be reviewed at least twice a year for accuracy.
If you've been denied credit, insurance or employment because of your credit report, you are entitled to a free copy of your report from the reporting agency the lender/insurance company used. The company you applied to must supply the credit bureau's name, address and telephone number. You have 60 days after receiving the denial notice to request your copy.
2. Examine your reports carefully
Nearly one-third of credit reports contain serious errors that could cause consumers to be denied access to mortgages, car loans and credit cards. That's because credit bureaus don't verify the information they receive from your creditors. Like it or not, keeping your credit report clean and true is your job. Once you get your three reports, look carefully for everything from typing errors to outdated and incomplete information. Make a thorough list of items you dispute and why.
If the negative information in your report is true, only time and improved habits can change that for the better. Late payments and charged-off accounts remain on your report for seven years, bankruptcies for 10 years. Most creditors, however, look for a steady pattern of payments rather than focusing on one-time or rare occurrences, so consistent on-time bill payments will improve those blemishes.
3. Dispute and document
Since a bad report can cost you money, it pays to be thorough. You can either complete the dispute form provided with your credit report or write a letter. Clearly identify each mistake and state why it's wrong. One recommendation is to send a photocopy of your credit report with the mistakes circled to the reporting credit bureau with copies of your supporting documents.
Keep copies and records of all the forms, letters and documentation that you send the credit bureaus, plus dates sent. In short, document, document, document. The credit bureau must investigate any relevant dispute within 30 days of receiving your letter. Any item that is not verified as accurate by a creditor is removed. If the credit bureau makes any changes to your credit file, it will send you the results along with a free, updated copy of your credit report. Once a negative item is removed from your report, the credit bureau cannot put it back on unless a creditor verifies its accuracy and completeness after the fact -- and sends you written notice.
4. Dissolve your debt
The next task is to devise a spending plan that reduces your debt and allows you to pay on time, all the time. If you're having difficulty making payments, be proactive. Call your creditors and negotiate with them to keep your accounts current and not be reported as delinquent or "bad debt." You can ask for reduced monthly payments, or even change due dates to balance out your monthly bills. The same strategy can be used for fixed-loan payments, but it should only be used for the short-term. You'll pay more interest to extend the repayment schedule, but it allows you to stay current and save your credit rating. Use the extra money to pay off debts one at a time, gradually increasing payments to other debts.
Slowly phase out the use of unneeded credit card accounts. But remember to NOT CLOSE THE ACCOUNT. Simply stop using it and pay it off. If you make the very common mistake of closing accounts you will almost certainly negatively impact your credit scores, which strongly considers the ratio of total credit card debt to total available credit or credit limits. A good rule of thumb is to keep your revolving credit card debt to less than 10 percent of your available credit. However, it’s optimal if you keep your balances low so you can avoid revolving balances. This will save you the interest charges
5. Add stability to your credit file
You can also work to add positive information to your credit file. You may have been denied credit because of an insufficient credit file, even though you do have credit. That's because some creditors (local banks, credit unions, and travel, entertainment and gasoline card companies) may not report your credit history to the bureaus. Try asking the credit grantors to report your account information and monthly payment history to a credit-reporting agency. This is not a requirement and you will not be able to force them to do so. In the future, before opening a new account, ask if your on-time payments will be reported monthly to all three credit-reporting agencies. If the answer is “no” then think about using another lender who will.
If you have really bad credit or even filed for bankruptcy, don't let your credit status go dormant. The faster you jump back in and begin to re-establish good credit by paying regularly on time, the faster you'll improve your credit scores. A secured credit card offers those with no credit and those rebuilding their credit an opportunity to start over and establish a new and solid credit history. Shop around for the best deal available, but limit your applications. Credit scoring models look at how many new accounts you've opened, as well as the number of "inquiries" for those new accounts. A sudden flurry of inquiries can result in a lower score.
