Plenty of Americans have a hard time handling their credit! If you are one of these people, you are not alone. In fact, 34.8% of Americans have a credit score that ranges from 580 to 669. Understanding what it means to have a low credit score is important. Your credit score can impact many different parts of your life! If you are dealing with a low score, you don’t have to be stuck in the same place. There are ways that you can repair your credit (even for free!).
Understanding a Credit Score
While you may want to focus on repairing your credit right away, it is important that you have a clear understanding of what a credit score is. A credit score is usually a number between 300 to 850. This number is calculated by credit bureaus based on information found on your credit report. Your report has information about your credit history, credit usage, credit accounts, etc.
The credit bureaus that do this calculation use a scoring model to determine how each factor on your report will impact your credit score. There are three main credit bureaus which are Experian, Equifax, and Transunion. The scoring model will vary based on the bureau. There are two major credit scoring models which are the FICO scoring model and the VantageScore model. However, the FICO scoring model is more popular since it’s used by 90% of top lenders. Your credit score is used by lenders as a way to determine your creditworthiness and how you handle credit!
What are Important Factors of Your Credit Score?
While the impact of each factor can vary based on the credit bureau (and scoring model), there are 5 top factors that will impact your score. These factors are:
- Payment History (which counts for 35% of your score)
- Credit Usage (which counts for 30% of your score)
- Credit History (which counts for 15% of your score)
- Hard Inquiries (which counts for 10% of your score)
- Types of Credit (which counts for 10% of your score)
This is the most important factor when it comes to determining your credit score. Your payment history includes how you handle making payments. If you have late payments, collection accounts, etc., then you will see that negative impact on your score.
Your credit usage (also known as your credit utilization ratio) looks at how much credit you are using compared to your total available credit. For example, let’s say you have two credit cards with a total credit limit of $1,800. If you are currently using $900 between those two cards then your overall credit utilization ratio would be at 50%.
How long you have had credit is the third most important factor. Your credit history will include your newest account, your oldest account, the average age of your accounts, etc. This can give lenders a better idea of how you handle credit both long-term and short-term!
There are 2 types of inquiries, which are either hard or soft! Soft inquiries have no impact on your credit score while hard inquiries do. A hard inquiry requires written permission from the account holder to allow a lender the ability to access a more in-depth look at their credit file.
Types of Credit
While this may not be the most important factor on this list, it is something to keep in mind. There are two main types of credit! There are installment loans and revolving credit. The types that you have can impact your score.
How to Repair Your Credit?
There are a variety of ways that you can handle credit repair. Generally you can either:
- Handle Credit Repair by Yourself
- Use a Credit Repair Company
The way you choose will determine how much (if anything) you need to pay. That is why you should compare your options before making a decision.
Handle Credit Repair by Yourself
The cheapest way to handle credit repair is to do it by yourself. Credit repair doesn’t need to cost an arm and a leg. Instead, you can do it for free by:
- Working on Your Credit Management
- Getting Help from a Credit Counseling Agency
- Disputing Errors You Find on Your Credit Report
Working on Credit Management
One of the most important parts of handling credit repair on your own is to improve your credit management. Oftentimes, people don’t realize that good habits can get them back on the right path. Some ways that you can work on improving your credit score includes:
- Make all payments on time
- Keep your credit utilization ratio below 30%
- Don’t allow too many hard inquiries at once
- Regularly check your credit score
- Only apply for new credit accounts when you need it
Getting Help from a Credit Counseling Agency
Credit counseling agencies are a great way for people to learn about their current credit situation. These agencies have trained and certified individuals that specialize in a wide variety of consumer issues like consumer credit, debt management, budgeting, and more. Another perk? Usually credit counseling agencies are non-profit!
Disputing Errors You Find on Your Credit Report
Another way that people can handle credit repair is through the dispute process. Before you can begin disputing anything, you will want to get a copy of your credit report. You are entitled to one free report every year. You can get one by visiting AnnualCreditReport.com. However, you can get one at any point throughout the year, you just may need to pay a small fee.
Now that you have your report, you will want to go over it to look for any errors. For example, let’s say that as you review your report, you find that there is an account that doesn’t belong to you. You can dispute this error with one of the three main credit bureaus!
Thanks to the Fair Credit Reporting Act (FCRA), credit bureaus are required to report only accurate information. If found to be an error, the item will be removed for your credit report by the credit bureau you submitted the dispute to. You will see any negative impact to your score drop off as well.
Use a Credit Repair Company
Another way that people choose to handle credit repair is by getting help from a credit repair company. However, it is important that you fully understand what a credit repair company is before you make any decisions!
What is a Credit Repair Company?
A credit repair company is a company that aims to improve your credit for a fee that a consumer pays. These companies do not provide a service that a consumer cannot do on their own. However, they claim that their experience can help consumers save time and effort. Credit repair companies can offer a variety of different credit repair services. The credit repair services you choose will impact the price that you need to pay.
How Do Credit Repair Companies Work?
Each company will work in its own way. However, generally you can expect the credit repair company you choose to handle the credit dispute process on your behalf. Instead of getting a free copy of your credit report, analyzing your report for errors, and disputing any inaccurate information you find, they will do that for you on your behalf. They may also offer other credit building advice or other credit repair services as well.
What Can Credit Repair Remove?
Credit repair can remove any inaccurate or unverifiable errors found on your credit report. Some common errors that can be found on a credit report includes:
- Identity Errors
- Incorrect Account Status Reporting
- Data Management Errors
- Balance Errors
How Much Does Credit Repair Cost?
The cost of credit repair will vary based on where you go, the services you get, etc. However, you can generally expect that it will cost between $50 to $150 a month.
Commonly Asked Questions
Should You Use Credit Repair Services?
In order for you to understand the best way to handle your current situation is to get help from a professional. While you can get some guidance from a credit counseling agency, you can also try speaking to your local personal banker at your financial institution. Personal bankers are another way that you can get some guidance and knowledge on how you want to handle your credit. Getting help from a credit repair company that offers credit repair services may be helpful but can be costly and doesn’t provide a service that a consumer cannot do on their own.
Do Credit Repair Companies Actually Work?
Credit repair companies can actually work if they are legit businesses and the consumer has a qualifying situation. Luckily, there is legislation aimed to help consumers when dealing with credit repair. There is the Credit Repair Organizations Act (CROA). This act aims to protect consumers by regulating credit repair companies.
How Does the Credit Repair Organizations Act (CROA) Protect Consumers?
This act can help protect consumers through legislation that helps a consumer spot legit credit repair companies. The CROA prohibits companies from:
- Exaggerating the services they provide
- Misrepresenting the services they provide
- Making false statements about your information to the credit bureaus
- Making promises to change your identity
- Providing consumers a new identity
- Charging consumers upfront before providing services
- Requiring the waiver of rights from consumers
How Should You Go About Hiring a Credit Repair Company?
You will want to make sure the company you choose for credit repair is legit. Making sure that the company you choose follows the rules of the CROA can help you make sure you are going somewhere that you can trust. This can help you avoid scams and find a company that can help.
How Many Credit Scores Do I Have?
It’s a common misconception that a person only has three credit scores (one from each major credit bureau). However, a person can actually have a variety of different credit scores depending on the credit report, scoring model, etc.
Will Credit Repair Work for Me?
It never hurts to focus on repairing your credit. However, the way that you do it can make a world of difference. For example, let’s say that there are no inaccurate items on your credit report. That means getting help from a credit repair company may not be your best bet. However, getting into good credit management habits can help! The best way to handle credit repair depends on your situation.
Your credit score is an important part of life. That is why you should make sure to take the time to improve your credit, regardless of your score. You can work on improving your credit through credit repair! There are a variety of ways that you can handle credit repair. The best way will depend on your current situation. You may benefit from getting in touch with a professional if you need some guidance. Take your time, and you will be able to see some serious improvements with your credit if you take the proper steps.