One of the first steps for many people when it comes to paying off debt and building wealth is learning what it takes to clean up bad credit. Having a spotless credit report won’t happen overnight, but it is a vital part of the process of getting out of debt and building wealth.
Today we’ll go over the necessary steps you need to take in order to improve your credit score and what the benefits are of cleaning up a bad credit report.
Why is Cleaning Up Your Credit Important?
Before you start to cleaning up your bad credit, it is important to understand the credit reporting system and how it affects borrowing, renting, and even job hunting.
In this day and age, a person’s credit report is used for many other things besides helping a company determine whether or not to lend you money.
When Your Credit Will Be Pulled
Although determining whether a potential client is creditworthy is still the primary reason for why credit reports are used, there are other reasons an organization might pull your credit report. Here are three reasons you might not already be aware of.
1. Renting a Property
Most rental management companies pull credit reports these days as a part of the approval process for renting someone a home or apartment. The belief is that if a person handles their credit accounts responsibly, they’ll also be sure to pay their rent on time.
If you’re looking to rent a quality home or apartment, a clean credit report is important to have.
2. Getting a Job
Many employers these days also pull an applicant’s credit report to check their level of responsibility in regards to handling their credit. The assumption here is that if a person pays their bills on time and manages their credit well, they’ll also be a responsible and valuable employee.
Don’t miss out on a great job opportunity because of bad credit. Instead, use the tips below to make your credit report sparkling clean, so that it reflects the person of value that you are.
3. Auto Insurance
That is right, auto insurance companies can factor in your credit score when determining how much you pay per month for auto insurance. The way they see it, the lower the credit score you have then the higher the risk they take on when insuring you.
A Bad Credit Snapshot
Credit reports contain information about many of the bills you have now or have had in the past. Credit card bills, car loans, mortgage loans, even medical, utility and other bills are often contained within a credit report. Here are some things that can indicate bad credit on a consumer’s credit report:
- payments made over 30 days late
- bills that have been turned over to a collection agency due to non-payment, even if you weren’t aware you owed the bill
- loans that you’ve co-signed on for someone else that haven’t been paid in a timely manner
- credit cards with balances over 70-80% of the total credit limit
- a high dollar amount total of credit cards owed on
What is a Good Credit Score?
All of the above bullet point factors can affect a consumer’s credit score. A person’s credit report is given a number, called a FICO score, that can range from 300 to 850. Here’s a breakdown of the credit analyses that are given based on a consumer’s FICO number:
- Excellent Credit: 760-850
- Very Good Credit: 700-759
- Good Credit: 660-699
- Fair Credit: 620-659
- Poor Credit: 580-619
- Bad Credit: Below 580
How You Can Clean Up a Bad Credit Score
If your FICO score is below 580, you’re considered to have “bad credit”. However, even “poor” and “fair” FICO scores can affect whether or not you’re approved for credit borrowing, rental applications and job openings. Here are five steps that you can take to clean up a bad credit report.
1. Pull your credit report
You can’t clean up bad credit until you know what’s on your credit report. Consumers are allowed by law to get one free copy of their credit report each year. The free credit report doesn’t usually include the actual FICO number, but you can request your FICO number for an additional fee.
Obtaining a copy of your credit report allows you to see what others see when they pull your credit report, and the free credit report offered annually to consumers contains all credit reported items.
2. Analyze the report thoroughly
Look through each reported item to check for accuracy. Credit reports sometimes contain errors such as reporting bills that are paid in full as not being paid, and reporting bills due that don’t belong to the creditor. Sometimes these bills are on one’s credit report simply due to an error, but other times incorrect credit accounts can be an indicator of fraud.
Therefore, it’s important to thoroughly read your credit report to make sure that all accounts listed on the report belong to you, and that those reports contain the correct amount owed, correct reporting of payment manner, etc. Your credit report will also list any old bills that have gone into collection status that haven’t been paid.
It’s important to make note of old, non-paid accounts, ensure they belong to you, and make a plan to get them paid.
3. Note items that have been written off or are in collections
If you see a bill on your credit report that says “written off”, that means that the company owed does not expect to be paid. Essentially, they’re reporting that they’ve exhausted all resources of getting you to pay and have given up. It’s important to contact these creditors, pay those bills and ask them to change the report to indicate that you’ve paid the bill. It’s also important to pay off any bills that have entered into collection status.
If you don’t have the cash to pay these bills in full, set up a zero sum budget that will contain a payment plan with the creditor or collection agency.
You can also use an online tool, like Personal Capital. Then follow up when the bills are paid in full to make sure your credit report shows a satisfactory report on the bills in question.
4. Note any credit card balances that are within 20% of the limit
As mentioned earlier, credit cards that have balances within 20-30% of the limit can affect a person’s credit score negatively. If you have credit cards that are nearing their limit in accessed credit, work to get them paid down as quickly as possible in order to raise your FICO score.
5. Resolve any errors or disputes
If you see an item or items on your credit report that are incorrect or simply don’t belong to you, contact the listed creditors or collection agencies and work with them to get the errors resolved.
If you find that your credit report contains fraudulent information or that your identity may be stolen, contact your local police department and/or work with a reputable fraud resolution company to stop the fraud attempts in their tracks.
Cleaning up your credit can take work, but the benefits that result from having a good credit report will be well worth the effort. Your reputation is important when it comes to doing business in today’s world, and a person’s credit report is often a direct reflection in the eyes of business owners of a person’s reputation.
Legit ways to get your credit report for free
If you’re not checking your credit report at least once a year, I highly recommend doing so. Here is how you can check your credit report for free.
Annual Credit Report
The Fair Credit Reporting Act is a law that allows consumers to get one free credit report each year from the three main reporting agencies, which are Experian, TransUnion and Equifax. Annual Credit Report is a company that allows you to choose from three different options for checking your credit report for free.
You can access their website at www.annualcreditreport.com, which allows you to access each of the three reporting agencies’ bureaus once per year by filling out information regarding your identity.
Getting Your Credit Score for Free
Although the free credit reports from Annual Credit Report will show you what’s on your credit report, they charge a fee if you want to know your actual credit score. If you want to get your credit score for free, you can use a company like Credit Sesame to access your credit score for free at any time. Credit Sesame is a company that helps people improve their credit score and gives regular access to their credit score at no cost, sharing tips for increasing that score.
You can also get your credit score for free using Credit Karma, which is a service that makes recommendations on products that you can use to better your financial situation.
What to Do if You Find an Error
When you get your credit report copy for free, it’s important to examine it thoroughly to make sure all of the information regarding loans and credit cards is accurate. Check balances on all outstanding debts listed on your credit report and make sure the information lines up with what you know to be your debt record.
If you find any errors, discrepancies or any potential fraudulent activity, it’s important to follow up with the individual bureau(s) the discrepancies are listed on and get more information from them regarding the report.
If you happen to find any long-overdue outstanding or written-off bills that you might have forgotten or weren’t aware of, make the necessary calls to get them paid off or make payment arrangements so that you can make sure your credit record gets and stays clean.
Having a good credit score and a clean credit report helps ensure that when you want to make a move such as buying a home or purchasing a car, you can get the best interest rate possible and get your loan quickly and easily.
It is important to take your credit report seriously, and to work to ensure that it reflects the responsible person that you are.
Do you check your credit report on a regular basis? If so, share your experience in the comments below.
Refinance Your Student Loans or Credit Cards
With the average credit card interest rate around 15%, this could save you a ton of money over the long haul. Check out Credible who will help you refinance your credit card debt to as low as 5.99%. Use this link to get a $50 bonus if you get approved.
Want to refinance your student loans? Credible can help you get as low as 2.78% APR. Use this link to get $150 cash back if you get approved for refinancing your student loan. The average graduate who refinances through Credible saves $18,668!