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 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 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 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 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.
Conversely, if you have bad marks on your credit record, a potential employer may assume you’re not responsible. It would be sad to miss out on a job you wanted because your credit record misrepresented you.
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.
Let your credit record bring you good things instead of hindering your life by costing your more.
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, the higher the risk they take on when insuring you.
If you have negative marks on your credit bureau you may need to pay higher insurance premiums. Cleaning up bad credit may result in lower auto insurance rates.
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. Your credit report contains a number, called a FICO score, that can range from 300 to 850. Here’s a breakdown of the credit analyses estimates that you’ll get based on your 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
You’ll be marked as having bad credit If your FICO score is below 580. 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. You can get one free copy of your credit report each year, by law. 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.
Make a 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 your credit report contains a reporting 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. This will raise your FICO score.
5. Resolve any errors or disputes
If you see an item (or items) on your credit report that is incorrect or simply doesn’t belong to you, contact the listed creditor or collection agency and work with them to get the error resolved.
If you find that your credit report contains fraudulent information or that your identity has been 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. A person’s credit report is often a direct reflection in the eyes of business owners of a person’s reputation.
6. Use tools to build your credit
Building credit can take some time, especially if you build it responsibly while trying to avoid debt. Tools like Self Lender may be able to help you do that. Self Lender can help you build good credit in a number of ways. First, Self Lender lets you monitor your credit score for free.
Second, Self Lender offers clients what they call a “Credit Builder” account. The Credit Builder account allows you to build a good credit score as you save. Here’s an example of how it works.
A $545.00 Credit builder account, paid 12 times over one year would have a monthly payment of $48.00, and an Annual Percentage Rate of 10.69%
Each month as you pay on time, they report your payments to all three of the credit bureaus. This reporting process helps you build up a history of making “credit” payments on time.
The payments you make are stored in a certificate of deposit (CD) account for 12 months. You will receive the funds that were stored in the CD, plus the interest earned on those funds after 12 months. So, in essence, Self Lender is helping you save money and build credit at the same time.
More Facts About Self Lender
Here are some other facts you might want to know about Self Lender.
- Self Lender works like a regular lender. If you make your $89 payment late, they’ll report you as late with the credit bureau.
- Late payments will result in a late fee charge of 5% of the payment amount. Your payment is considered late if it is made 16 days or more over after due date.
- If you have to close your account early, you’ll get charged an early withdrawal fee of $1 or less.
You can always pay off your “loan” before the one-year time period is up and get your money back early. However, that kind of defeats the purpose. It takes time to build up good credit, so leaving your money with Self Lender will help with that. And as a bonus; you’ll have an extra $1,000 in savings when you get done with their one-year plan.
Building Credit Without Borrowing
Building up credit with companies like Self Lender is safe because you aren’t really borrowing money. You’re simply making payments to them on your behalf. Yet, since they’re reporting to the credit bureaus, you’re establishing good credit as you save.
You’re not taking on any additional debt, yet you are helping to build yourself better credit. This is similar to how a secured credit card works. Secured credit cards have savings balanced attached to them. First, you deposit the money into a savings account. Then, they issue you a coordinating credit card with a limit that matches your savings account balance.
As you use the secured credit card, you make payments back to it each month. You can make minimum payments or pay the balance in full. If for some reason you stop making payments, the company takes the balance due from your savings account.
But the Self Lender system is actually better than a secured credit card because there’s no credit card for you to accrue a balance on. You’re only saving; never spending.
Building Good Credit Through Saving
Building good credit through saving means you never have to worry about accumulating a credit card balance. Yes, the balance is secure because of your savings account match, but it’s the habit that can be dangerous.
The habit of spending money you don’t have by accruing credit card balances encourages you to live above your means. Companies like Self Lender help you build your credit through saving and not spending. Your credit bureau sees your account as a loan, but it’s really your own money you’re borrowing.
You might be wondering what Self Lender gets out of the deal and how much it costs. Here’s how that part of it works. You pay the $12 administrative fee plus $89 per month for 12 months. That equals $1080. At the end of your 12 months, you get $1,000 plus interest.
Self Lender gets the rest. It helps to cover their costs and pay their staff. You still get your account balance of $1,000 plus the interest it earns at the bank where your CD is held.
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 the three different reporting agencies to check 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
The free credit reports from Annual Credit Report will show you what’s on your credit report. But, 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. They give regular access to your credit score at no cost. They also share tips for increasing that score.
You can also get your credit score for free using Credit Karma. Credit Karma 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 is accurate. Check balances on all outstanding debts listed on your credit report. Make sure the information lines up with what you know to be your debt record.
If you find any discrepancies or potentially fraudulent activity on your credit report, you’ll need to follow up with the individual bureau(s). Get more information from them regarding the discrepancies or fraud and do what you need to do to clear them up.
You’ll want to take care of any long-overdue outstanding or written-off bills that you might have forgotten about or weren’t aware of. Make the necessary calls to get them paid off or make payment arrangements. This way you can make sure your credit record gets and stays clean.
Having a good credit score and a clean credit report helps you when you want to make a purchase such as buying a home or a car. You’ll get the best interest rate possible and get your loan quickly and easily.
Whether you’re applying for a job or trying to get the lowest rate on a loan, your credit record matters. 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.