Complete Guide to Credit Repair and Management

STEP 1: To begin, you will need a current copy of your (3) credit reports. It is important to note that there is more than one credit reporting agency, so make sure you get a copy from each. Some creditors may report to one agency but not another. (Just because something doesn’t show up on a credit report from one bureau doesn’t mean it isn’t reported on another.)

It is a little known secret that you are entitled to a free annual copy of your credit report. Also, any time you are within 30 days of being turned down for credit you are entitled to a free copy of your credit report.

However, applying for credit and getting turned down shows up on your report as an inquiry that did not result in credit. It is a black mark that stays on your report for 90 days. To avoid this, take advantage of the free report you are entitled to under State and Federal law.

The credit agency will require ALL of the following information:

• FULL NAME,
• ADDRESS,
• SOCIAL SECURITY NUMBER,
• DATE OF BIRTH, 
• SEX   
• OCCUPATION/EMPLOYER.

The free report typically does not include your FICO or credit score. If you want that you will usually have to pay a small fee, and I don't recommend this until much later in the process of upgrading your credit.

The three major credit bureaus are:

EQUIFAX

Order Credit Report:800-685-1111.
To Report Fraud: 888-397-3742.
Internet address - www.equifax.com/

EXPERIAN

Order Credit Report: 888-397-3742
To Report Fraud: 888-397-3742
Internet address - www.experian.com/

Order Credit Reports: 800-888-4213
Report Fraud: 800-680-7289
Internet address - www.tuc.com/

STEP 2: Once you have copies of your credit profile, check all the personal information (name, address, etc.) To make sure it is accurate. Note any changes that need to be made. Understand that recent address changes or changes in employer may result in being turned down for credit, so every item on your credit report is important.

Before going further you need to learn how to "read" a credit report. Credit bureaus use codes. When you begin reading your reports, refer to the following list of commonly used codes and what they mean:

Who is Responsible for the Account:

• J = Joint Account
• I = Individual
• T = Terminated
• M = Maker (signer)
• C = Co-Maker
• U = Undersignated
• A = Authorized User
• B = On behalf of another
• S = Shared
• Type of AccountO = Open account (30 or 90 days)
• R = Revolving or option account (open-end)
• I = Installment Account (fixed number of payments)

Current Method of Payment:

• 0 = Approved for credit, but too new to rate
• 1 = Pays account as agreed
• 2 = Pays (or paid) after 30 days of due date but before 60 days, not more than one payment due at any given time.
• 3 = Pays in more than 60 days, but less than 90, or two payments past due.
• 4 = Pays in more than 90 days, less than 120, three payments past due
• 5 = Pays in more than 120 days.
• 7 = Making payments under wage-earner plan or similar arrangement.
• 8 = Repossession
• 9 = Bad debt, placed for collection; written off.

These symbols are often combined, such as R2, which means it is a revolving account and has been at least one payment late less than 30 days. Often each payment is recorded, showing if it was late, how late, and by how much. Your objective, then, is to get all 1's.

Understand that credit bureaus are not responsible for what is on your report. Their only function is to provide the information to creditors that is provided to them. It is your responsibility to see that your report is accurate. Check it at least annually and make any necessary corrections.

It has been estimated that nearly 50% of all credit reports contain inaccurate information that can cause credit problems. It is not unusual for accounts to appear that you never had. So check your credit report thoroughly and often. If you do not, you will have no one to blame but yourself.

STEP 3: Now that you know what is on your report, the next step is to list the names and account numbers of every derogatory item on your report, even if it is valid and true. Write a letter using the following guidelines:

• --State that you have reviewed your profile and found certain items you believe to be in error.
• --List all bad items by name and account number.
• --Request that they investigate these items as they are highly injurious to you. (Use the words HIGHLY INJURIOUS.)
• --List discrepancies in the personal information first, and provide the correct information, then list the accounts.
• --At the end of the letter state that these items do not agree with your records and you wish to have them removed immediately. Also state that you want an up-dated copy of your report issued to you showing any changes made.

Once the bureau receives your request they are required by law to contact the creditor who listed each contested item and ask for substantiation. If the information is not true, the creditor will not be able to substantiate.

The real beauty of this system, however, is that many creditors will not bother to respond. Either they no longer have the record handy, or they are busy, or the letter gets lost in some pile, or maybe they really just don’t care. Whatever their reasons, if they do not provide documentation to the bureau within a reasonable time (usually 30 days) the credit bureau is required by law to remove the item from your report.

If you do not receive an up-dated copy of your record within 45 days, send a certified letter requesting the up-date, stating the date you originally disputed the items. Again be sure to include all personal information, as this is how they locate your report. When you have the up-date, check it against the original and note the differences. You should find that many, if not all, derogatory items have been removed.

It is important to note that occasionally (not often) a creditor will not report within the allotted time but will re-submit the negative report a month or two later. In that case you will receive a corrected credit report but then the derogatory item will re-appear later.

STEP 4: If any derogatories remain after your first letter, do not despair - you have just begun. To remove any items that are still plaguing you, your next step should be a repeat of the prior one. Send a new dispute letter stating you still believe these items are in error and to please investigate again.

This time when the bureau contacts the creditor, the creditor may not respond a second time. Why not? Perhaps he thinks it is a duplicate request sent by mistake. Or perhaps he will just say, "to heck with it" thinking he responded once and simply will not waste any more of his time. Or maybe the letter gets lost in the incoming pile, or she is busy, or...

Whatever the reason, she may not send documentation a second time. If not, the item is removed from your report.

STEP 5: Again, request an up-dated copy of the credit report showing any changes. When it arrives, check it thoroughly. If any bad items still remain, you have other options at your disposal, including:

STEP 6: If you cannot get the creditor to work with you, you still have a powerful weapon left. This is where keeping copies of certified letters will pay off. You have a legal right to enter into your credit report, a 100 word statement showing proof that you made attempts to settle this account but the creditor refused.

If the debt truly is not owed by you, the statement can be used to prove you do not owe this account. The statement is attached to your report and issued to every creditor who checks your credit. You may also request that a copy be sent to every creditor your report was sent to in the last 90 days. Often, your written account, accompanied by documentation, will convince creditors that you are a good risk.

There you have it - credit repair made easy.

Managing Your Credit Reports and Scores

Before we begin a discussion of measures you can take to maintain a high score on your credit report, you need to understand how a report is scored. The exact answer to that is proprietary information which is closely guarded by the credit reporting agencies.

Fortunately, however, we do know a lot about the scoring of credit reports. For example, we know how the scores are weighted.

• Payment history - 35%
• Outstanding debt - 30%
• Length of credit history - 15%
• Mix of credit - 20%
• Inquiries - 10%

Many people think that Credit reporting agencies are unreasonable and arbitrary but actually every time a score is penalized there is a logical reason for it that makes sense. Once you understand that logic you have control of your score.

In order to make the best choices for achieving and maintaining a high credit score you need to understand the five elements of credit scoring.  Let's begin...

Payment history - 35%

This is simply a reflection of the timeliness of your debt payments -

• on time,
• 30 days late,
• 60 days late, or
• 90+ days late.

Each late loses you points and you also lose points as the time of lateness increases. In most cases, after two years the negative effect of these late payments drops off the score even though the listing still shows up on your report. Get letters from creditors where you know your records aren’t true, and forward a copy to the reporting bureaus. Just eliminating reporting errors can change a score as much as 220 points in extreme cases.

Outstanding debt - 30%

This is based on how much you owe and how high your balances are in comparison to the limit on the account. In other words, are the balances maxed out?

• A balance under 30% of the card limit is good and will add points to your score.
• 50% is Okay and will neither add nor detract from your score.
• a balance of more than 50% of the account limit is penalized a lot.
• Exceeding the account limit doubles the penalty charged against your score.

Because of this scoring element it is unwise to put all your debt on a single card (even to save interest rates). To the credit reporting companies it signals that you do not know how to manage your credit and your money. The higher the limits on your credit cards, the better (as long as you have not used it up).

Length of credit history - 15%

This is a very important element of your credit score. It is based on how long you’ve had the credit account and how long you’ve paid that credit on time. Opening a new credit card is Okay (but keep the balance under 30% of the available credit limit).

Each time you close a credit account, you lose the beneficial points from accumulated history on that account as well as the available balance, so you deduct points from two sectors of your credit scoring.  An account that you’ve maintained for several years adds 15% more to your score than a new account.

Mix of credit - 20%

This scoring element refers to the types of credit you have. The ideal mix is

• a mortgage,
• a car loan and
• 4-5 credit cards.

Inquiries - 10%

Inquiries are categorized as either hard or soft. Hard inquiries are from lenders checking your credit in order to make a decision to give you credit. They cost you 2-50 points. The more hard inquiries your have, the higher the penalty. Inquiries resulting in denied credit, results in higher penalties as well.

Soft inquiries don’t cost you any points (they consist of self-checking, lenders doing periodic reviews, insurance inquiries, etc.).

When shopping for home or auto you can have as many inquiries as you want for 14 days. For example, if you have credit pulled by a mortgage broker everyday for two weeks it is only treated as one inquiry for scoring purposes. Also, after approximately10 hard inquiries in a year, no more penalties from inquiries are applied to your score. 

Common Misconceptions and Related Tips:

TRUE:  Closing credit cards is very bad for your credit score in most cases.  You lose in two categories, i.e., length of history and available balance.

TIP #1 Pay all credit cards as close to zero as possible (or to 30% of their limits) but do not close them. Closing a credit card can only hurt you a majority of the time because you are effectively increasing your debt ratio when you close those accounts.

• Remember, pay off the credit cards but do not close them and your credit score will increase significantly.
• If you can’t afford to pay the cards to zero then pay all of them below 50%
• It is better for your credit score to have the balances spread evenly over all cards rather than have two maxed out.
• Pay down and spread credit evenly amongst your cards. 

MYTH:  Paying off collections or charge-offs will improve your score.

TRUE:  Actually it doesn’t make a big difference at all. In fact, if you pay off a collection or charge-off that is over two years old, the lender reports a new activity which brings that derogatory to a recently reported event.  In other words you would effectively bring that old derogatory report current.  The result will be a sudden drop in your score.

If you're refinancing a home, it’s better to pay off your older bad debts with the refinance of your home than before the refinance. That way, your credit won't be negatively effected until after you have qualified for the loan.

TIP #2 First, use the "validation of debt law" which demands that the creditors substantiate their claim that you have bad debt (See Step 3 in the previous section).

Secondly, negotiate a deletion letter. Whenever you are settling unpaid collections, tell the collection agency that you will pay 100% of the balance due if they agree to completely delete the account from the credit bureau. If they say yes, make sure you get it in writing on their letterhead before sending them a check. This is a good idea because a paid collection is not much better than an unpaid one and can actually be worse. You want the account completely deleted to maximize your credit score. Don’t pay unless you get a deletion letter or a written agreement to provide a deletion letter 

MYTH:  It is smart to consolidate all your debts on to the card that has the lowest interest rate.

TRUE:  If you do that you will substantially hurt your credit score.  Don’t consolidate all your debt on to one card in order to save interest rate costs. Instead, ask for a lower rate on your cards. One of the worst things you can do to your credit score is to max out a card.

TIP #3 Call all of your credit card companies (call the customer service number on the back of your card) and ask for a credit line increase without them having to pull your credit report. Many will increase your credit limit based upon your payment history. This will decrease your debt ratio and increase your credit score as a result. While you have them on the phone ask them to reduce your interest rate as well.

MYTH:  It’s always better to pay in cash.

TRUE:  Don’t stop using credit cards. The ideal number of accounts for maximum scoring benefit is 4-5. The account becomes inactive after 3-4 months of inactivity and no longer applies to your score. Keep your accounts active but below 30% of available credit.

TIP #4 Do all rate shopping for cars and mortgages within a 14 day period. All Auto and mortgage related inquiries made in a 14-day period are treated as ONE inquiry for scoring purposes

3 Steps to Establish credit when you have none

1. Open a secure card (you pay money into the card and then your charges are deducted from your deposit until it is used up.)
2. Find a family member that will allow you to become an authorized signer on an old card. That will put your social security # on a credit card account with a good long history and a good debt ratio. It will be reported as if the card were your own. Make sure your Family member gives your social security number to their credit card company. This can move a FICO score from the low five hundreds to the low 600's in about 5 months. Only do this if the card has a low balance and has been established for several years with a positive payment history.
3. Open small amounts of credit wherever you can - your bank or credit union and car loans are often the easiest places to start credit when you have none established. A car loan paid as agreed will contribute substantially to a high credit score because it contributes in two ways - payment history and credit type mix.

Wishing you a smooth road to the credit score of your dreams.

Copyright 2005-2006 Joyce M. Morris All rights reserved

Joyce Morris