Marla Loggins, a Senior Branch Manager with Southern Home Mortgage (our Preferred Lender), shares her insight on the 5 steps you need to take to repair your credit.
Find out where your credit currently stands. To do that, you need to obtain a copy of your credit report, from all three bureaus and including all three scores. There are numerous websites you can go to for a free copy such as, www.creditkarma.com or www.annualcreditreport.com, etc.
Look for any accounts that aren’t reported correctly. Are there any old accounts that are paid off that are still showing that they’re open or with a balance? If you’ve had a bankruptcy, make sure all the accounts that were included in the bankruptcy are showing a zero balance. Look at the public records section and make sure if there are any tax liens or judgments that have been paid that they are listed as satisfied or released. If you find discrepancies, you need to write a letter to all three credit bureaus asking them to update the information and enclose a copy of the paid receipt, the cancelled check or statement showing a zero balance. In the case of a lien or judgment you’ll need to send a copy of the satisfaction or release from the court. Often times when you pay off a judgment, the creditor doesn’t let the court know that it’s been paid, so you’ll need to get a copy of your receipt from the original creditor, take it to the courthouse and ask them for a release, which you can then send to the credit bureaus to have updated.
Look at any accounts that are listed as derogatory. Make sure you don’t have any payments more than 30 days late in the last 12 months.
Look at any collection/charged off accounts. A common misconception is that collections automatically fall off your credit report after 7 years. That only applies if they are paid off. As long as there is a balance, the creditor can update their reporting every month and they will stay on forever. Or if a creditor sells the debt to a different collection agency, it will show up as a brand new collection. You should start with the most recently reported accounts and begin paying them off one by one, the ones in the most recent 12 months being the most critical. You can contact the creditor and settle for less than the original amount due, as long as they give you a letter stating that they accepted it as payment in full for the account. Housing related collections such as an apartment complex or a utility bill are also important to pay off if you’re planning to purchase a home. Medical collections do not have as great an impact as other types, but if they are reported in the most recent 12 months, they will bring down your score. You will want to make sure and get a receipt when you pay them off and write a letter to all three credit bureaus asking them to update your report and enclose a copy of your receipt. This will get your report updated in a few weeks time whereas if you wait for the individual creditors to report the accounts as paid, it may take 60-90 days.
Create a current, positive credit situation. Just as important as cleaning up a negative credit history is making sure you have a current, positive history building. You need to have at least two open revolving (credit card) accounts and one open installment loan. You will want to make sure the accounts are with a bank or credit union large enough to report to all three credit bureaus so that it builds all three scores. If you can’t get approved for a regular credit card account, open a secured credit card. The bank will ask you to deposit an amount in a savings account with their bank, and they will extend a credit line equal to the amount in the savings account. A common amount to start with is $300. The savings account stands as collateral for the credit card, so there is less risk to the bank. Once you have demonstrated the ability to use and manage the credit card for an agreed on period of time, the bank will release your savings account and you will have a regular credit card account. The single most important thing to remember about credit card accounts is that you never want your balance to be more than one third of the available credit limit, at any time during the billing cycle. So if your credit limit is $300, don’t let your balance ever be more than $100. This is called a credit utilization ratio and it demonstrates to the credit scoring model that you have credit and have the ability to use it wisely and it will enhance your credit score quickly. For your installment loan, you want it to be with a bank or credit union as opposed to a finance company. Finance companies make it easy to get a quick loan, but the way their loans are structured to renew frequently, to the credit scoring system it appears that you never have a long track record of payments on a single account, and these will not enhance your credit score.
Finally, you should know that credit scores are generated based on a number of different criteria such as payment history, number of accounts you have and length of time you’ve had them open. They are also based on who is pulling them. The credit score you’ll get on a free website that is consumer driven can be very different from the score your car dealership will pull for a car loan, your bank will pull for a checking account or most importantly, your mortgage lender will pull for a mortgage application. The reason is the criteria the score is calculated on is different depending on the purpose it’s being pulled for. A mortgage report has a much more stringent scoring criteria because you are applying for a larger amount of money.