Credit Repair

Payment history: 35%, Amounts owed: 30%, Length of credit history: 15%, New credit: 10%, Types of credit used: 10%

There are a few really easy techniques to improve your credit worthiness and therefore your ability to purchase a home.  I am not a credit expert, I am a realtor in Minnesota that has seen over 200 home buyers and many of those people needed a little help getting their credit improved.  I’ve often said that a credit score should really be called managing your debt over time score!!!  Before we talk about techniques to credit repair, let’s take a quick look at how credit is reported:

What’s in a Credit Score

Credit scores are calculated from a lot of different credit data in your credit report. This data can be grouped into five categories as outlined below. The percentages in the chart reflect how important each of the categories is in determining your FICO score.

These percentages are based on the importance of the five categories for the general population. For particular groups – for example, people who have not been using credit long – the importance of these categories may be somewhat different.

Payment History
  • Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
  • Presence of adverse public records (bankruptcy, judgements, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
  • Severity of delinquency (how long past due)
  • Amount past due on delinquent accounts or collection items
  • Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
  • Number of past due items on file
  • Number of accounts paid as agreed
Amounts Owed
  • Amount owing on accounts
  • Amount owing on specific types of accounts
  • Lack of a specific type of balance, in some cases
  • Number of accounts with balances
  • Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
  • Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)
Length of Credit History
  • Time since accounts opened
  • Time since accounts opened, by specific type of account
  • Time since account activity
New Credit
  • Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
  • Number of recent credit inquiries
  • Time since recent account opening(s), by type of account
  • Time since credit inquiry(s)
  • Re-establishment of positive credit history following past payment problems
Types of Credit Used
  • Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Improving your Score

Now that you understand what’s in a credit score, let’s take a look at how to improve that score:  Here’s a quick list:

  1. Pay your bills on time or early – FOREVER
  2. Pay off your balances owed to less than 50% – start with credit cards (hint: don’t pay off balances completely)
  3. Make sure you have different types of credit and no more than one or two of each.
    1. Installment Loan – car loan or student loan
    2. Revolving Loan – credit cards or unsecured revolving debt
    3. Mortgage
  4. Keep on keeping on – since the credit score should really be called managing debt over time your goal should be to keep on making payments, over a long period of time!

Here are more tips from myfico.com:

More Tips on How to Fix a Credit Score & Maintain Good Credit

Payment History Tips

Contributing 35% to your score calculation, this category has the greatest effect on improving your score, but past problems like missed or late payments are not easily fixed.

  • Pay your bills on time.
    Delinquent payments, even if only a few days late, and collections can have a major negative impact on your FICO score.
  • If you have missed payments, get current and stay current.
    The longer you pay your bills on time after being late, the more your FICO score should increase. Older credit problems count for less, so poor credit performance won’t haunt you forever. The impact of past credit problems on your FICO score fades as time passes and as recent good payment patterns show up on your credit report. And good FICO scores weigh any credit problems against the positive information that says you’re managing your credit well.
  • Be aware that paying off a collection account will not remove it from your credit report.
    It will stay on your report for seven years.
  • If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
    This won’t rebuild your credit score immediately, but if you can begin to manage your credit and pay on time, your score should increase over time. And seeking assistance from a credit counseling service will not hurt your FICO score.

Amounts Owed Tips

This category contributes 30% to your score’s calculation and can be easier to clean up than payment history, but that requires financial discipline and understanding the tips below.

  • Keep balances low on credit cards and other “revolving credit”.
    High outstanding debt can affect a credit score.
  • Pay off debt rather than moving it around.
    The most effective way to improve your credit score in this area is by paying down your revolving (credit cards) debt. In fact, owing the same amount but having fewer open accounts may lower your score.
  • Don’t close unused credit cards as a short-term strategy to raise your score.
  • Don’t open a number of new credit cards that you don’t need, just to increase your available credit.
    This approach could backfire and actually lower your credit score.

Length of Credit History Tips

  • If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.
    New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

  • Do your rate shopping for a given loan within a focused period of time.
    FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
  • Re-establish your credit history if you have had problems.
    Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
  • Note that it’s OK to request and check your own credit report.
    This won’t affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

  • Apply for and open new credit accounts only as needed.
    Don’t open accounts just to have a better credit mix – it probably won’t raise your credit score.
  • Have credit cards – but manage them responsibly.
    In general, having credit cards and installment loans (and paying timely payments) will rebuild your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
  • Note that closing an account doesn’t make it go away.
    A closed account will still show up on your credit report, and may be considered by the score.

To summarize, “fixing” a credit score is more about fixing errors in your credit history (if they exist) and then following the guidelines above to maintain consistent, good credit history. Raising your score after a poor mark on your report or building credit for the first time will take patience and discipline.

I hope this helps out: for more information, call Travis Anderson at 651-485-6383 or visit TravisAndersonRealtor.com.