Why is Credit Repair Important?

Plenty of Americans can find themselves in need of credit repair. In fact, 18% of Americans have a subprime credit score between 580 to 669. Not only that but 11.1% of Americans have an ultra-high-risk score of below 580. Combining these statistics, 29.1% of Americans have a less than fair score. If you are dealing with this issue, you are not alone. Your score is an important part of life which is why you need to make sure it stays on the right track. There are plenty of ways to repair your credit if you need to improve your current score!

What is Your Credit Score?

Before you can focus on improving your score,  it is important that you have a solid understanding of it! Your credit score is a number typically between 300 to 850. Lenders use this score as a way to better understand how you are as a borrower (your creditworthiness). Your score will be important when it comes time to purchase a car, buy a home, and more.  This score is calculated based on information found on your credit report by the credit bureaus.

There are 3 major credit bureaus which are Experian, Equifax, and Transunion. They calculate this score based on your credit report and the scoring model they choose. Your report contains detailed information about your credit history like credit card debt, late payments, and more. There are two main scoring models which are either VantageScore or the FICO scoring model. However, the FICO scoring model is more common and is used by 90% of top lenders.

What Factors Impact Your Credit Score

If you are looking at the FICO scoring model, there are five main factors that impact your score which include:

  • Payment History
  • Credit Utilization Ratio
  • Age of Credit History
  • Credit Diversity
  • Hard Inquiries

Payment History

Lenders rely on information about your payment history to get a better idea of how you handle your repayment responsibilities. That is why it accounts for 35% of your credit score. If you have a history of collection accounts, late payments, etc., then you can expect to see your score heavily impacted.

Credit Utilization Ratio

This is the second most impactful factor of your credit score at 30%. Your credit utilization ratio looks at the amount of credit you’re using compared to your total credit limit. Let’s look at an example! If you have a credit card limit of $3,000, and you have only used $1,500 of that available credit then your credit utilization ratio would be 50%.

Age of Credit History

The age of your accounts plays a role in your credit score. Your newest accounts, your oldest accounts, the average age of your accounts, etc., are considered. This factor accounts for 15% of your score.

Credit Diversity

There are different types of credit accounts that a person can have. If an individual has both installment loans and revolving credit accounts, then lenders can see how they handle each. This isn’t a super important factor since it only accounts for 10% of your score.

Hard Inquiries

Finally, hard inquiries account for 10% of your score as well. There are two types of inquiries: hard and soft. Soft inquiries do not impact your score while hard inquiries do. Hard inquiries require written permission from an individual to allow lenders to get this in-depth look at their credit file!

What is a Bad Credit Score and a Good Credit Score?

People can choose to work on improving their credit at any point. However, they typically start the process when they see that they have a bad score. You can check your score for free through a variety of different platforms like Credit Karma, Capital One, Discover, etc. Regardless of how you choose to check your score you will find that it falls into a certain category based on the scoring model you look at. For the most popular FICO scoring model:

  • Excellent: 800-850
  • Very Good: 740-799
  • Good: 670-739
  • Fair: 580-669
  • Poor: 300-579

If you look at the VantageScore model then the categories are a little bit different:

  • Excellent: 781-850
  • Good: 661-780
  • Fair: 601-660
  • Poor: 500-600
  • Very Poor: 300-499

Generally scores that are below 669 on the FICO scoring model are considered “bad”. Bad credit scores can lead to higher interest rates, less flexible agreement terms, or even disqualification from eligibility. A good credit score can help get lower interest rates and better loan terms.

Understanding Credit Repair

When people see that they need to improve their score, they can handle that process in a variety of different ways. Popular options include:

  • Credit Repair on Your Own
  • Get Help from a Credit Repair Company

Credit Repair on Your Own

If you choose to handle credit repair on your own then you can handle that process in a bunch of different ways. You can:

Better Handle Credit Management

People can improve how they handle their credit with a variety of different tactics. Good habits include:

  • Make payments on time
  • Pay at least the minimum amount due
  • Don’t allow too many hard inquiries at once
  • Keep your credit utilization ratio below 30%
  • Consider keeping unused credit accounts open instead of closing them
  • Monitor your credit score
  • Apply for new credit when needed

Use a Credit Counseling Agency

Sometimes people can be completely lost when it comes to handling their credit situation. Other times, people just want more education to better understand their credit and how to improve it. Regardless of the reason, people can get helpful guidance from a credit counseling agency. These are generally non profit organizations that have trained and certified employees available to help consumers.

People can go to these agencies with questions about their financial situation. Certified counselors can provide a person with a plan of action to handle their credit situation based on what they are dealing with. They can provide a variety of services from:

  • Developing a budget for you
  • Helping you manage your debts
  • Analyzing your credit situation to help you get your plan of action together
  • Providing workshops and other education
  • Creating a debt management plan (DMP)

Dispute Errors on Your Credit Report

Another way that people try to repair their credit is through the dispute process.  A person can get a copy of their credit report and analyze it for any inaccurate items. If inaccurate items are found then a person can submit a dispute with one or all of the major credit bureaus. These bureaus generally have 30 days to investigate and respond. If the item is found to be inaccurate it will be removed from the report and the negative impact will be gone!

Get Help from a Credit Repair Company

Sometimes consumers may choose to get help from a credit repair company when handling the dispute process. When you get help from one of these companies, they can provide credit repair services that handle the dispute process on your behalf. They would be the ones to analyze your credit report, find inaccurate items, and submit a dispute with the credit bureaus. These companies are not free and generally cost between $19 to $149 a month depending on the credit repair services you get. However, the credit repair services they offer can be done for free by the consumer on their own.

Why Credit Repair is Important

Credit repair is important because it can help you get your credit score back on the right path. A good rule of thumb to keep in mind is the better the score then the better the terms. For example, a good credit score can get you a lower interest rate on an auto loan. Lower interest rates can help you save money over the course of the loan! You can have an easier time qualifying and get better terms.

Commonly Asked Questions

There may be questions you have about credit repair that others have had as well!

How Much Does Credit Repair Cost?

If you choose to repair your credit on your own then it is completely free. However if you choose to get help from a credit repair company then you can expect it to cost an average of $19 to $149 a month.

Are There Downsides to Credit Repair?

The downsides that come along with credit repair are based on the method you choose. For example, you may run into a scam if you try to get credit repair services from a credit repair company. Even though the Credit Repair Organizations Act (CROA) provides laws around credit repair, people can still be scammed.

Which Credit Bureau is Used the Most?

The important credit bureaus to keep in mind are Experian, Equifax, and Transunion. There is not one credit bureau that is especially better amongst the three of them!

Are There Only Three Digit Credit Scores?

Yes! A person cannot have their score go below 100 or over 999. Typically scores can be between 300 to 850.

Bottom Line

Credit repair is important no matter what score you have (but can be especially important if you have a lower credit score). There are plenty of ways that you can repair your credit, whether you decide to do it on your own or get help from a credit repair company. The best solution for your situation will depend on what you’re dealing with. If you need guidance, you can get help from a credit counseling agency that can give you a plan of action in achieving your financial goals!

Article References

https://www.badcredit.org/how-to/bad-credit-statistics/

https://www.investopedia.com/terms/c/credit_score.asp

https://www.ficoscore.com/about

https://www.experian.com/blogs/ask-experian/what-is-a-bad-credit-score/

https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/

https://www.experian.com/blogs/ask-experian/credit-education/faqs/how-to-dispute-credit-report-information/

https://www.investopedia.com/how-much-does-it-cost-to-repair-my-credit-5077091

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