Repairing Credit

In the twenty-first-century United States, having good credit is often of great importance. Without good credit, it can be difficult to buy a home or vehicle, secure a loan, or even obtain a job. As such, many people with poor or mediocre credit choose to take steps to repair their credit, often implementing simple strategies such as reducing debt and consistently making on-time payments. Some individuals address their credit problems by consolidating their debt or enlisting the help of organizations devoted to repairing credit. As one’s credit report can have far-reaching effects on one’s personal finances, it is important that an individual seeking to repair his or her credit proceed with caution to avoid damaging his or her credit further or being taken advantage of by unscrupulous lenders or credit-repair companies. Government entities such as the Federal Trade Commission (FTC) can assist individuals in distinguishing helpful strategies and organizations from detrimental ones.

Background

A person’s creditworthiness has long played a role in his or her ability to obtain loans or purchase items on credit, but for centuries, this quality was not quantifiable. By the second half of the twentieth century, however, the concept of the credit score revolutionized the lending industry in the United States, enabling a person’s creditworthiness to be expressed in numerical form. The most commonly used form of credit score, the FICO score, was introduced by the Fair Isaac Corporation in 1989. A person’s credit score is based on a variety of factors, including his or her number of open lines of credit, amount of money owed, length of credit history, number of hard credit inquiries (typically from applying for loans), and number of missed payments or defaulted accounts. One’s credit can therefore be damaged by a history of late payments, too much debt, or default. An individual may also have a relatively low credit score if he or she has very little credit history, even if that history is good.

As lenders generally use a prospective borrower’s credit score and credit report as key factors in determining whether to lend to that individual, having good credit is often very important. Without good credit, it can be difficult to obtain common loans such as mortgage loans or vehicle loans or to obtain credit cards. Some lenders, particularly those specializing in student loans, are more lenient toward borrowers with little to no credit history; however, such lenders often require that an individual with an established credit history cosign for the loan, thus providing additional assurance that the loan will be repaid. It is not impossible to obtain a loan or credit card with poor or mediocre credit, but borrowers in such cases are typically offered loans with very high interest rates and are thus required to pay their lenders far more money than they originally borrowed.

For individuals who have no interest in owning a home or obtaining a credit card, credit may at times seem to be an irrelevant concept. However, one’s credit history can affect numerous other areas of life as well. Some landlords include credit checks as part of their rental applications and may refuse to rent to an individual with bad or no credit. In addition, some employers run credit checks on their applicants and take the results into consideration when making hiring decisions. This is particularly common in industries in which employees have access to large sums of money or sensitive information, such as banking, government, and the military. Because of such practices, even individuals who are generally opposed to taking on debt may take measures to repair or build their credit.

Overview

To repair one’s credit, one must first determine the state of one’s credit report and identify the problem areas. One can accomplish this by obtaining one’s credit report from one or more of the three American credit bureaus: Experian, Equifax, and TransUnion. In accordance with the terms of the Fair Credit Reporting Act, an individual may access his or her report from each bureau for free once per year. Companies that ask for payment in exchange for providing an individual with his or her credit report should thus be avoided. After obtaining the credit report, one should review it carefully and contact the credit bureaus to have any mistakes or instances of fraud, such as accounts opened through identity theft, removed. Next, one should determine which factors are proving detrimental to one’s credit; these may include a history of delinquent payments or the overall amount of debt one has. One can then begin to take measures to repair one’s credit by addressing those problem areas.

Basic Strategies

Perhaps the simplest way to repair one’s credit essentially comes down to using credit responsibly. A history of delinquent payments is detrimental to one’s credit, but consistently making payments on time is beneficial. Reducing debt by making the required payments or additional payments will decrease one’s overall debt utilization, and paying off loans or credit card balances entirely will likewise improve one’s credit. One should also avoid taking on new debt while working to repair one’s credit. Some experts recommend that individuals hoping to repair their credit pay for goods and services primarily with cash in order to avoid accumulating additional credit card or loan balances.

While such basic strategies can have a significant positive effect on one’s credit, they are not immediate or even quick solutions. Credit improves gradually over time through the payment of debts and responsible use of credit. Records of problems such as missed payments, defaulted accounts, or bankruptcies, which are collectively known as "derogatory marks," remain on a credit report for a set period of time—seven years for most—but will eventually disappear. Time and patience are thus essential to the credit-repair process, and they are likewise key in the case of individuals who have poor or mediocre credit not because of derogatory marks but because of a lack of credit history. In such cases, however, an individual may opt to pursue a number of strategies that involve taking on debt in a careful, considered manner. For example, one might choose to build credit by taking out a small loan and paying it off immediately or opening a low-limit credit card that one pays off every month. While taking on debt in order to build credit is risky in that it could lead some individuals to spend irresponsibly, it can be a helpful strategy if managed with care.

Debt Consolidation

Individuals seeking to improve their credit may also consider consolidating their debt. The process of debt consolidation involves obtaining a new loan equal to the amount of money collectively owed on one’s existing loans. One then uses those funds to pay off the earlier loans, essentially trading multiple loans for one. This enables an individual to have a single loan payment instead of many, thus simplifying his or her finances and reducing his or her risk of losing track of which payments have been made. In some cases, the consolidation loan may have a lower interest rate than the original loans, which in turn reduces the overall amount of money the borrower is required to pay. By making regular payments on the new loan, the individual can then establish a history of on-time payments and gradually improve his or her credit.

While loan consolidation is a useful strategy for some individuals seeking to repair their credit, it is not appropriate for everyone. In order to obtain a consolidation loan with a reasonable interest rate, one must have relatively good credit to begin with. In addition, the act of taking out a new loan will likely have an initially negative effect on one’s credit, as both hard credit inquiries and number of open accounts are factored into one’s report. However, paying off one’s existing loans will likely have a correspondingly positive effect.

Professional Assistance

Although many individuals choose to pursue simple credit-repair strategies on their own, some opt to seek professional assistance in repairing their credit. Licensed credit counselors are able to review an individual’s financial information, advise him or her on what steps to take, and sometimes assist in taking those steps. When operating as part of a nonprofit organization, credit counselors often provide counseling services at little to no cost. It is important to research credit counselors and other credit-repair professionals carefully, as unscrupulous credit-repair companies sometimes prey on individuals with poor credit. Credit-repair companies are regulated in the United States by the 1996 Credit Repair Organizations Act, which prohibits such companies from charging for services in advance, making fraudulent claims to clients, encouraging clients to lie to creditors, or providing ostensibly new credit profiles while in fact committing identity theft. Government entities such as the FTC provide numerous informational resources about legitimate and illegitimate credit-repair techniques and can help concerned individuals identify scams and dishonest credit-repair services.

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