Life handed you a series of events that took you by surprise. Not only did your bank account suffer, but so did your credit rating. And now that you are back on track, it’s time to start rebuilding your credit. Easier said than done as you have no idea where to start or how long the entire process will take.
What’s the first step to take when rebuilding your own credit? What issues in your credit report should you tackle first? Is it necessary to pay off all your debt right away? Should you hire professional help?
If any of these questions are running through your head, don’t fret. In this guide, you’ll learn a step-by-step approach to rebuilding your credit score when starting over, along with other strategies to keep your score in tip-top shape once you’re where you want to be. And you’ll discover how to know when it’s time to hire professional help.
Step 1: Get a Copy of Your Credit Report
Visit www.annualcreditreport.com to get a copy of your credit report from the three credit bureaus, which are Equifax, Experian, and TransUnion. These are the same agencies you will need to contact if you want to do a credit freeze. By law, you’re entitled to one free copy annually from each bureau.
You can also get a copy if it’s been less than a year but you were recently targeted for fraud or identity theft, are unemployed and planning to look for work within 60 days, or are currently receiving welfare benefits. And if you were recently turned down for credit, a job, or insurance, you can also get a free copy of your report.
Step 2: Circle Any Incorrect Entries and Negative Items
Grab a highlighter or colored pen and analyze the report. The first review should be for errors or items you don’t recognize. Once you’ve identified and highlighted all the incorrect entries, take another look but this time around, you’ll be highlighting any negative items listed.
Step 3: Create a Strategy
Ready to get started with rebuilding your credit? You’ll be doing so in two phases: tackling credit reporting errors followed by addressing those nasty negatives.
But before you can create a strategy to get your score out of the trenches, you need to understand how your credit score is calculated. That way, you’ll know which areas of your credit report to focus on first.
What’s In Your Credit Score
FICO is the credit score used by 90 percent of lenders and creditors to render a lending decision. It is comprised of five components:
- Payment History (35 percent of your FICO score): do you make timely payments on your outstanding debt balances? Just one late payment can tank your credit score by up to 100 points.
- Amounts Owed (30 percent of your FICO score): what percentage of your credit limit is currently in use? This is referred to as your credit utilization ratio. (Please note that installment loans aren’t factored into this ratio).
- Length of Credit History (15% of your FICO score): how long have you managed debt products?
- Account Mix (10% of your FICO score): do you have both revolving (i.e. credit cards) and installment (i.e loans) debt products in your arsenal?
- New Credit (10% of your FICO score): how often do you apply for new credit accounts? Voluntary or hard inquiries are generated each time you submit an application for credit and impacts your credit score between two and five points.
How to Deal With Errors
Start by drafting up and sending out credit report dispute letters. Wondering why you should start with dispute letters? No need to leave your credit score in the mud if your report is inundated with inaccuracies or accounts that are past the reporting timeline. Rectifying or removing these errors gives you an accurate picture of where you really stand before diving in deep.
Credit Report Dispute Letters
Prior to writing your dispute letter, have a copy of the report handy along with any supporting documentation to plead your case. Next, use this template provided by the Federal Trade Commission (FTC) to guide you as you draft up your letter.
Your letter should include the following contents:
- Your name and address
- The credit report number
- Description of the item you’re disputing
- Reason for your dispute
- The course of action you would like to be taken (i.e. removal or updating)
Send the completed letter, along with a copy of your report with the item in question highlighted and any supporting documentation, via snail mail to each of the credit bureaus since they do not communicate with one another. Also, send copies to the creditor or information furnisher to speed up the process.
Pay for a return receipt so you’ll know exactly when the package arrived. The credit reporting agency has 30 days from the initial date of receipt to launch an investigation with the creditor or information furnisher and respond to your dispute. If they don’t, the item in question must automatically be removed.
What about online disputes? Aren’t they much easier? Somewhat, but if the credit bureau does not rule in your favor, you automatically waive your right to a redispute. For this reason, it’s better to use postal mail.
*Quick Note: Refrain from disputing information that is both accurate and timely as your dispute can be labeled frivolous by the credit reporting agency and subsequently tossed out. There are smarter ways to deal with negative items on your credit report. More on that shortly.
How to Deal With Negative Items
As mentioned earlier, negative items that are both accurate and timely shouldn’t automatically be disputed. Some wiser approaches to take:
Do you have late payments on your credit report on accounts that are now in good standing? If the negative marks are a reporting error, file a dispute. Otherwise, reach out to the creditor and request a goodwill adjustment.
Be pleasant when on the phone with the representative and explain that the late payment(s) were honest mistakes or due to a rough patch but now you’ve turned a new leaf and are hoping to get the mark removed to accomplish whatever objective you have. It may take a few tries to have success, and you can even try writing a goodwill letter.
What about those debt balances that were charged-off for nonpayment? Start by contacting the initial creditor to confirm that the debt has actually been sold off. There are instances where they are willing to reopen the account balance and work with you directly, which means more money in their pocket and far less damage to your credit score.
But if the debt has already been sold off for pennies on the dollar, request that the collection agency provide proof that you actually owe the debt. (They should be willing to send you a letter stating how much you owe, along with evidence that they can legally collect on the debt). If the debt is listed with several collection agencies, follow this process with each entity until you get to the bottom of who actually owns the debt.
Next, draft up a pay-for-deletion agreement that states you’ll pay a fraction of the debt in exchange for the removal from your credit report. You need to specify what that amount will be in the letter; it shouldn’t exceed 50 percent of the balance as the collection agency more than likely paid pennies on the dollar for the debt.
Be persistent (but pleasant) and if you don’t have any luck after some time, move on to other pressing issues in your credit report. Why so? Well, paying the balance in full won’t help you raise your credit score if the collection agency isn’t willing to remove the negative entry. Instead, it will simply be annotated as a paid collection.
Verify Old Debts
Most collection items will vanish after seven years. But if you insist on dealing with older debts right now, you have the option to verify the items with the credit bureaus. This approach could be risky because you could awaken the beast with debt collectors but may work with older or smaller collection accounts, like medical debts, old phone, and utility collection accounts.
Bonus Tip: Use DIY Credit Repair Software
These programs are loaded with templates you can use to draft up letters and get moving with the credit repair process in a fraction of the time. Even better, they’re moderately priced so your wallet won’t take a big hit.
How to Deal With Serious Negative Items
Unsure of how to address those more serious negative items, like public records (i.e. tax liens, judgments, foreclosures, bankruptcies), evictions, or repossessions? It’s in your best interest to address errors, dated information, and other negative items as these can be extremely difficult to have removed.
But if you want to try your luck, you can try to have them verified and cross your fingers. Or if you’re really determined, solicit the assistance of an attorney to assist. If you choose the latter, the cost of services could easily outweigh the benefits of having the items removed if they’re close to falling off your credit report.
Other Ways to Improve Your Credit Score
Some other simple and straightforward strategies to start rebuilding your credit score:
- Take care of outstanding balances to stop more late payments from appearing on your credit report.
- Continue to make timely payments on your debts each month.
- Reduce your credit card balances as much as possible. Keeping the credit utilization ratio below 30 percent is the sweet spot.
- Request a credit limit increase on your existing cards to lower your credit utilization ratio.
- Consider a credit card consolidation loan, which could also help your utilization ratio overnight.
- Become an authorized user on a credit card responsibly managed and has a low balance.
- Only apply for new credit as needed.
- Apply for a credit-builder loan with Self Lender.
When to Hire Professional Help
Prefer to leave the credit rebuilding process to the pros? It may not be such a bad idea if you’re overwhelmed with the idea of repairing your own credit or are strapped for time. But keep in mind that there’s nothing a credit repair company can do for you that you can’t do for yourself, so it may be worthwhile to dive in and see what you can do.
Still not convinced? If you can afford to do so, go ahead and hire a reputable credit repair company that’s accredited by the Better Business Bureau with a strong rating, has stellar consumer reviews, and competitive pricing compared to others in the industry.
Word to the wise: while they’re working to repair your credit, stay abreast of what’s going on. It’s your credit rating and your money, so you should be steering the ship. And if at any time you’re not satisfied with their services, don’t be afraid to walk away.
How Much Is Credit Repair?
Your investment will vary by provider, but expect to pay between $60 and $130 for credit repair services on a monthly basis. You may also be assessed a first-work fee for the company to pull your credit report and devise a strategy. However, it is illegal under the Credit Repair Organizations Act for them to bill you for services until work has been rendered on your behalf.
The Bottom Line
The process of rebuilding your credit may take a little elbow grease to see the results you’re looking for. But if you’re persistent, you’ll have success and be well on your way to restoring your credit health in record time.