Credit Repair Basics: Ways to Improve Your Credit Score

A credit bureau, or credit reporting agency, collects credit information about you from banks and other organizations, consolidates the information into a credit report and sells the report to lenders, insurers, employers and other businesses with a legitimate need for it. The businesses use the report and a calculated credit score to assess your risk level for credit cards, loans, insurance, employment, leases and more. The primary national credit bureaus are Equifax, Experian and TransUnion. By law, you’re entitled to one free credit report from each of these credit bureaus every year.

Your credit report includes personally identifiable information and other evidence about how you pay your bills and whether you’ve filed for bankruptcy. Most accurate information (positive and negative) stays on your report for 7 years—bankruptcy information usually for 10 years. A good credit report makes it easier for you to get loans and other types of credit with higher credit limits and lower interest rates—saving you money.

Your credit score is a number that reflects your credit risk level; it predicts the likelihood that you will repay your credit obligations. Typically, a higher number indicates higher credit worthiness, which results in the best credit opportunities for you.

The most widely used credit score is a FICO® score, produced from statistical models developed by the Fair Isaac Corporation (hence the name). FICO® scores range between 300 and 850 and are based on the information in your credit reports. FICO® scores predict the likelihood that you will have a payment that is 90 days or more past due during the 24 months after the score is calculated. The higher the FICO® score, the less likely you will be 90 days or more past due in the next 24 months.

Your FICO© Score is calculated from several types of data in your credit report. This data is grouped into five categories, weighted in terms of importance. There are numerous actions you can take to positively influence your credit score in each of these areas. [Find out more … links to the respective video]

1. Payment History (35%)
   Thirty-five percent of your credit score is made up by your payment history, which includes late payments, collections and even bankruptcies and tax liens. Each type of account stays on your credit report a specific amount of time, and each negative item can hurt your score differently. Credit Management Specialists works to remove accounts that are not 100% accurate or 100% verifiable. Our removal rate of inaccurate items is 70%. Find out more …
2. Debt Ratio (30%)
   Your debt ratio is the amount of revolving credit (e.g., credit cards) that you owe in relation to the amount of credit you have available (your credit limit). For instance, if your current balance is $2,000 and your credit limit is $10,000, your debt ratio would be 20%. A history that includes several cards showing small monthly balances is generally more favorable than a single card that’s maxed out every month. Find out more …
3. Length of Credit History (15%)
   The length of time you’ve had credit (longer is better) is important. At face value, this factor seems like something you can’t do anything to fix. However, there are several ways you might hurt yourself. If you close out your older cards—even if they have higher interest rates—you’ll hurt your score. The credit scoring model has no memory of credit cards you close: If you close out that 15-year-old card, you’ve shortened your credit history. Find out more …
4. Types of Credit Used (10%)
   Types of credit include revolving credit (credit cards, retail accounts), installment loans and mortgages. By keeping different kinds of credit open, you show creditors that you are responsible and able to handle different types of financial obligations. Find out more …
5. Inquiries (10%)
   Inquiries are recorded on your credit report whenever you ask for new credit (e.g., when you apply for a home loan or a new credit card). In general, a lower number of inquiries is better—especially if you’re opening an account only to get a free gift or a good deal on a purchase and you don’t intend to use the account. Inquiries you make and unsolicited offers do not count against your score, but they do show up on your report. When searching for a home, you are allowed unlimited inquiries over a one-month period because it’s assumed you are rate shopping. Find out more …

Credit repair encompasses actions that you can take now and going forward to correct inaccuracies in your credit reports and build or rebuild a favorable credit history that results in a higher credit score.

The Fair Credit Reporting Act (FCRA) regulates the collection, dissemination and use of consumer credit information. The law mandates that information about you in a credit bureau’s files must be accurate, timely and verifiable, and the law gives you the right to dispute inaccurate or questionable information. Credit bureaus may not reinstate information that you successfully dispute, and they must remove information that is obsolete or unverifiable.

Disputing inaccuracies typically involves the following steps:

1. Request your free credit reports.
2. Carefully check each one to ensure the information is accurate. In particular, look for:
   • Clerical errors
   • Questionable entries—especially late payments
   • Information that’s outdated (typically more than 7 years old)
   • Incorrect account numbers, credit limits, terms
   • Accounts that are not yours (might indicate identity theft)
3. Identify the items you need to dispute.
4. Write letters to the credit bureaus and your creditors.
5. Wait (30 days by law) for responses to your disputes.
6. Repeat Steps 3–5 as needed until you succeed in getting inaccuracies corrected.

But there’s more to credit repair than disputing any inaccuracies in your credit report. Credit repair also must focus on actions you take now and going forward to manage credit in ways that positively influence your credit score. [Link to Manage Credit subpage]

Most consumers understand that missed payments will appear on their credit reports and cause their credit scores to go down as a result. Generally, you should be in good shape if you

• Pay your debts on time
• Don’t carry too much debt on any one credit card
• Don’t close older unused accounts unless absolutely necessary
• Apply for new credit only when you need it

But to improve your credit score, you need to take additional steps long term. These suggestions serve as a starting point:

1. Monitor your credit reports on a regular basis.
2. Dispute inaccuracies and outdated items on your reports.
3. Maintain low balances (compared to credit limits) on your credit card accounts.
4. Sustain the length of your credit history.
5. Keep different types of credit open if it makes financial sense for your situation.
6. Apply for new credit only when you need it.