Credit Repair Toolbox

Before you start boosting your credit score, you need to know the basics. You need to know what a credit score is, how it is developed, and why it is important to you in your everyday life.

Lenders certainly know what sort of information they can get from a credit score, but knowing this information yourself can help you better see how your everyday financial decisions impact the financial picture lenders get of you through your credit score. A few simple tips are all you need to know to understand the basic principles:

Understand where credit scores come from.

If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. Without this information, you won’t be able to effectively improve your score because you won’t understand how the things you do in daily life affect your score.

If you don’t understand how your credit score works, you will also be at the mercy of any company that tries to tell you how you can improve your score — on their terms and at their price.

In general, your credit score is a number that lets lenders know how much of a credit risk you are. The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.

In general, the higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates.

Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there.

Credit scores are a lot like GPAs or SAT scores from college days – while they give others a quick snapshot of how you are doing, they are interpreted by people in different ways. Some lenders put more emphasis on credit scores than others.

Some lenders will work with you if you have credit scores in the 600s, while others offer their best rates only to those creditors with very high scores. Some lenders will look at your entire credit report while others will accept or reject your loan application based solely on your credit score.

The credit score is based on your credit report, which contains a history of your past debts and repayments. Credit bureaus use computers and mathematical calculations to arrive at a credit score from the information contained in your credit report.

Each credit bureau uses different methods to do this (which is why you will have different scores with different companies) but most credit bureaus use the FICO system.

FICO is an acronym for the credit score calculating software offered by Fair Isaac Corporation company. This is by far the most used software since the Fair Isaac Corporation developed the credit score model used by many in the financial industry and is still considered one of the leaders in the field.

In fact, credit scores are sometimes called FICO scores or FICO ratings, although it is important to understand that your score may be tabulated using different software.

One other thing you may want to understand about the software and mathematics that goes into your credit score is the fact that the math used by the software is based on research and comparative mathematics. This is an important and simple concept that can help you understand how to boost your credit score. In simple terms, what this means is that your credit score is in a way calculated on the same principles as your insurance premiums.

Your insurance company likely asks you questions about your health, your lifestyle choices (such as whether you are a smoker) because these bits of information can tell the insurance company how much of a risk you are and how likely you are to make large claims later on.

Studies have shown, for example, that smokers tend to be more prone to serious illnesses and thus require more medical attention. As a result, if you are a smoker you likely face higher insurance premiums.

Similarly, credit bureaus and lenders often look at general patterns. Since people with too many debts tend not to have great rates of repayment, your credit score may suffer if you have too many debts.

Understanding this can help you in two ways:

1) It will let you see that your credit score is not a personal reflection of how

“good” or “bad” you are with money. Rather, it is a reflection of how well lenders and companies think you will repay your bills – based on information gathered from studying other people.

2) It will let you see that if you want to improve your credit score, you need to work on becoming the sort of debtor that studies have shown tends to repay their bills.

You don’t have to reinvent yourself financially and you don’t have make more money. You just need to be a reliable borrower. This realization alone should help make credit repair far less stressful!

Credit reports are put together by credit bureaus, which use information from client companies. It works like this: credit bureaus have clients —

such as credit card companies and utility companies, to name just two — who provide them with information.

Once a file is opened on you (i.e. once you open a bank account or have bills to pay) then information about you is stored in your record. If you are late paying a bill, the clients call the credit bureaus and note this. Any unpaid bills, overdue bills or other problems with credit count as “dings” on your credit report and affect your score.

Information such as your type of debt, amount of debt, and how regularly you pay your bills on time are all used to calculate your credit score.

Your age, sex, and income do not count towards your credit score.

The actual formula used by credit bureaus to calculate credit scores is a well-kept secret, but it is known that recent account activity, debts, length of credit, unpaid accounts, and types of credit are among the things that count the most in tabulating credit scores from a credit report.

Keep the contact information for credit bureaus handy.

The three major credit bureaus are important to contact if you are going to repair your credit score. These three credit agencies can help you by sending you a copy your report.

If you find an error on your credit report, these are also the companies you must contact to correct the problem. You can easily contact these organizations by mail, telephone, or through the Internet:

Equifax Credit Information Services, Inc
Address: P.O. Box 740241
Atlanta, GA 30374
Telephone: 1_888_766_0008

TransUnion LLC Consumer Disclosure Center
Address: P.O. Box 1000
Chester, PA 19022
Telephone: 1_800_888_4213

Experian National Consumer Assistance Center
Address: PO Box 2002
Allen, TX 75013
Telephone: 1_888_397_3742

You may want to note this information wherever most of your financial information is kept so that you can easily contact the bureaus whenever you need to.

Develop an action plan for dealing with your credit score.

Once you have your credit report and your credit score, you will be able to tell where you stand and where many of your problems lie.

If you have a poor score, try to see in your credit report what could be causing the problem:

– Do you have too much debt?
– Too many unpaid bills?
– Have you recently faced a major financial upset such as a bankruptcy?
– Have you simply not had credit long enough to establish good credit?
– Have you defaulted on a loan, failed to pay taxes, or recently been reported to a collection agency?

The problems that contribute to your credit problems should dictate how you decide to boost your credit score.

As you read through this E-Book, highlight or jot down the tips that apply to you and develop a checklist of things to do that will help your credit situation improve.

When you seek professional credit counseling, the counselors will generally work with you to develop a personal strategy that expressly addresses your credit problems and financial history.

With this E-Book you can develop a similar strategy on your own — in your own time and at your own cost.

When developing your action plan you need to understand where most of your credit score is coming from:

1) Your credit history

Your credit history accounts for more than a third of your credit score in most cases.

Whether or not you have been a good credit risk in the past is considered the best indicator of how you will react to debt in the future.

For this reason, late payments, loan defaults, unpaid taxes, bankruptcies, and other unmet debt responsibilities will count against you the most. You can’t do much about your financial past now, but by paying your bills on time, starting today, you can boost your credit score in the future.

2) Your current debts

Your current debts accounts for approximately a third of your credit score in most cases.

If you have lots of current debt it may indicate that you’re stretching yourself financially thin and so will have trouble paying back debts in the future.

If you have a lot of money owing right now — especially if you have borrowed a great deal recently — this fact will bring down your credit score.

You an boost your credit score by paying down your debts as far as you can.

How long you have had credit

This factor accounts for up to 15% of your credit score in many cases. If you have not had credit for very long, you may not have enough history to let lenders know whether you make a good credit risk.

You can counter this by keeping your accounts open rather than closing them off as you pay them off.

The types of credit you have

This factor accounts for about one tenth of your credit score in most cases.

Lenders like to see a mix of financial responsibilities that you handle well. Having bills that you pay as well as one or two different types of loans can

actually improve your credit score. Having at least one credit card that you manage well can also help your credit score.

As you can see, it is possible to only estimate how much a specific area of your credit report affects your credit score. Nevertheless, keeping these five areas in mind and making sure that each is addressed in your personalized plan will go a long way in making sure that your personalized credit repair plan is comprehensive enough to boost your credit effectively.

This article is an excerpt from “Credit Score Confidential” an in-depth and comprehensive publication on credit repair written by Amazon book selling author Margaret Ortiz.