Credit repair is a lengthy process that requires constant attention, time, and patience. Many myths surround the topic, and we are here to make things clear, from understanding what credit is to factors impacting your creditworthiness. Learn the tricks of the industry, and don’t be fooled by an easy way out.
Nailing the 5 C’s of Credit
While the academic years might be a thing of the past, you are continuously “graded” in other spheres of your life, and creditors’ evaluations are no stranger to the process. Many lenders use the 5 C’s of credit as a frame of reference to assess potential loan candidates in terms of their creditworthiness. The characteristics include character, capacity, capital, collateral, and conditions.
There won’t be any screening or psychological tests performed – your character is evaluated on the basis of your general creditworthiness. Specifically, you are merely viewed in terms of your credit history. Using this methodology, lenders can quickly estimate your personality related to trustworthiness, accountability, and commitment. Other aspects that may contribute to the overall assessment of your character are your past relationships with financial institutions, work ethic, references, and credentials.
Mastering your character may be a timely process if your credit is in questionable condition. Raising your credit score and building strong relationships with lenders are inevitable in improving your reputation. Hiring professional credit repair experts and getting in touch with credit counseling services are the first steps in moving things forward.
Capacity is your cash flow – your ability to repay all of your financial obligations in a timely manner. Essentially, capacity is measured by whether you are capable of handling another loan. Lenders evaluate your income, debt, payable accounts, credit score, and your repayment history. Many creditors will use a DTI system, debt-to-income ratio, which corresponds to your gross monthly income versus current debt.
Paying off large portions of your debt prior to applying for a new loan is essential to make your capacity more fluent.
Some lenders require a down payment as an industry standard. The percentage of money-up-front varies depending on your individual situation, the purpose of the loan, and the type of loan you are trying to obtain. Your capital is also measured in terms of other assets or investments.
Before applying for a loan, make sure you have substantial savings that prove you can afford the obligation.
Collateral, in other words, is securing the loan with an asset. If you are looking to buy a car, your car is the asset that, upon default, you agree to give up to the lender. Collateral includes any other backup in case you are not capable of repaying the loan, such as any real estate, your home, equipment, and other items evaluated based on their value.
The conditions of the loan are a set of variables considered by potential lenders. Conditions may refer to the loan’s amount and interest rate but may also include the purpose of borrowing money. Generally, a loan with direct intent, such as a mortgage or car loan, is more likely to be approved by the creditor than personal signature loans of unknown purpose.
How To Get Your Credit Data For Free?
You have probably heard the rumors that checking your credit report or your credit score may affect your credit negatively. We bust this myth: by federal law, you are entitled to a free annual credit check. And although many advertised websites offer credit reports, the only reliable and safe source of a free credit report is AnnualCreditReport.com, where you will gain access to information from all three major credit bureaus: Experian, Equifax, and TransUnion. You will go through a process of verifying your personal information to prevent identity theft. Regular monitoring of your report is extremely crucial to ensure no invalid or inaccurate information is hurting your credit. It will also give you an insight into your current situation and help you understand why you have been denied a loan or a new credit line.
How To Review My Credit Report?
Credit Report is ultimately your credit resume. Credit bureaus collect the information submitted by your lenders and gathered from various public records. Before approving you for a loan, creditors thoroughly examine your credit history, paying attention to all 5 C’s of credit, and reviewing your borrowing and repayment records provided within the report.
So, what is included in your credit report?
- Personal Identifiable Information (PII), including your name, addresses you have used in the past, former and current employers, and your social security number. This section is often overlooked by consumers, but it is essential to carefully review all of the personal information provided on the report. If there are any misspellings, wrong addresses, or an incorrect social security number – dispute all the inaccuracies.
- Credit account history, including the types of accounts, the dates you opened the accounts, credit amounts and limits, payment history, and the current balance on all of your accounts and credit lines. Ensure all of the information matches your records, even if the account in question is in good standing. Good standing refers to the timely payments and meeting terms with the creditor, and analogously, negative accounts will display missed or late fees.
- Credit Inquiries is a list of all lenders who have accessed your credit report within the last two years upon your permission when applying for a loan. Those include “hard” and “soft” inquiries; however, only “hard” inquiries are presented to the lender.
- Public Records and Collections include all bankruptcies you have filed in the past. Delayed debt that has been sent to collections is also entered in this section of your credit report.
Can I Fix My Credit On My Own?
Most certainly, yes. Depending on your unique current situation, the credit repair process is a time-consuming journey requiring patience, determination, and some basic knowledge.
Once you have carefully reviewed your credit report, highlight all inaccurate or outdated information. Any identified error is subject to a potential dispute. You would be surprised how often mistakes happen on a credit report. Those may include:
- Incorrect personal information (name, home address, phone number)
- Identity theft that resulted in a wrongfully attributed account
- Closed accounts listed as open.
- A repaid collections account reported as unpaid and other remedied delinquent accounts.
- A debt listed more than once
- Outdated accounts (7 years)
- Incorrect balances on the accounts
- Inaccurate credit limits
Start the dispute process in 5 easy steps:
- Identify and highlight all errors on your credit report.
- Contact the creditor or the organization that reported false information. Those range from utility companies to financial institutions, such as banks. With a little willpower and polite boldness, you may be able to resolve the issue on the spot. If that doesn’t happen, take action with the credit reporting bureau.
- Download a dispute template or create your own in the form of a letter, precisely explaining the identified error on your credit report. Include all documentation that proves a mistake has occurred and request immediate removal or correction. You may want to provide your derived credit report with highlighted information. Make copies of all the materials for your record and send the documents to the credit reporting agency, preferably by certified mail.
- The credit reporting bureau is acting as your mediator between you and the lender. All the relevant information will be provided to the creditor, who then, upon investigation, will report back to all three credit bureaus. The process may take up to 30 days. You may follow up if you do not receive a prompt response.
- Follow Up. Once the investigation of the credit report error is concluded, you should expect to receive documentation of the results and a corrected report. If the dispute process was unsuccessful and the inaccuracy persists, it’s time to follow up with the credit bureau.
What are 609 letters, and do they really work?
Considered a credit repair secret weapon, the 609 dispute letter refers to section 609 of the Fair Credit Reporting Act (FCRA), which highlights the legal rights of consumers for obtaining copies of their credit report along with relevant documentation. In fact, the 609 letter does not outline any terms related to disputing negative information from your credit report. Mistakenly, people tend to associate the so-called legal loophole as a way to get rid of any harmful entries, even if they are accurately presented in your report.
Factors that don’t affect your credit score
Checking your credit score for your personal reference is considered a “soft inquiry,” and it does not affect your credit in any way. Frequent monitoring of your credit helps you catch any mishaps and changes that may negatively impact your financial well-being.
Your income does not impact your credit score. Although earning less or sudden loss of income does affect your ability to repay your financial obligations in most cases, your income by itself cannot lower or raise your credit score.
Your race, gender, marital status, level of education, and other irrelevant personal information do not impact your credit score.
Your debit account is not factored into your credit score. Any charges made through your bank account are not included in your credit report; therefore, they do not impact your credit.
“Hard” inquiries are reflected in your credit report and may slightly affect your credit score. However, being denied a loan or credit line is not included in your credit report.
If you wish to help someone in need by offering to pay for their credit dues, that’s a beautiful act of kindness, but it will not increase your credit score. It will, however, positively affect the account owner’s creditworthiness.
There is a lot of confusion related to authorized users. Adding a person to your credit line does not affect your credit score unless the authorized user abuses your trust by maxing out your credit account and not repaying the debt.
Should I pay a collection agency?
Getting intimidating and often harassing phone calls from debt collectors may push your buttons and submit to paying large sums of money to make the problem go away. Or worse – permit them to access your bank accounts. Negotiate an agreement with the collections agency and request a formal copy of the documentation. Try to get the best deal, ideally lowering your debt, and set up a fixed amount that you will pay monthly in exchange for the removal of the collections from your credit report. Yes, you heard that right. You can negotiate with the collections agency to remove the damage from your credit report. Paying off or ignoring the debt is not going to change your situation; the destruction has been done – your score will be impacted either way.
What is a Goodwill adjustment letter?
A goodwill adjustment letter is an attempt to remove a slip-up on your account, such as one missed payment, from a credit report. Missing a payment can do some serious damage to your credit score, and if you are a reliable consumer who pays the bills on time, the lender may consider granting your request. However, the financial institution is under no legal obligation to accept your petition no matter the circumstances.