It’s important to note that credit repair is legal in all 50 states. There’s a federal law that guarantees consumers the right to dispute information in their credit report to have it corrected.
There’s also a federal law that outlines how credit repair companies can provide services to consumers. These two laws basically set the foundation for how credit repair works in the U.S.
The Fair Credit Reporting Act (FCRA) is the law that essentially created the credit repair process back in 1970. Small private companies started providing consumer credit histories in summary reports to banks starting in the 1960s. The reports helped banks make lending decisions for local customers. But consumers found that these reports weren’t always entirely accurate. Since this affected people’s ability to qualify for loans, the federal government stepped in to regulate credit reporting.Rights guaranteed under the FCRA
The FCRA did more than just create the credit repair process, though. It also provided the following protections for consumers:
- It limits who can view your credit report. So, not just any private citizen can request a copy of another consumer’s report. Your report can only be reviewed for:
- Loan and credit applications
- Insurance purposes
- Court cases
- Bank closures
- In most cases, you must authorize a company to review your report. So, even when you apply for a loan you must give them permission to pull your report.
- It also limits what can be said in your credit report. This part of the law limits what information gets listed in your report and for how long it gets listed.
- It guarantees the right to accuracy. This basically means that credit reporting agencies (credit bureaus) must take every action possible to ensure the information is accurate.
- This part of the law creates the credit repair process, which states that a consumer has the right to submit a dispute to question the accuracy of a reported item; the bureau has 30 days to verify the item or it must be removed.
- It also guarantees consumers the right to know what their report says. This is the part of the law that gives people a free annual credit report from each bureau.
- Finally, it creates the fraud alert process, which gives consumers a way to prevent fraud if their identity has been compromised.
When it comes to credit repair, the Fair Credit Reporting Act outlines the process credit bureaus must follow.
- Credit reporting agencies (CRAs) must accept disputes from consumers free of charge.
- They must respond within 30 days, but if there is any follow up then they have an additional 15 days to respond.
- The bureau must contact the lender or original provider of the information to verify it within 5 business days.
- The agency has a right to terminate a dispute if it’s deemed frivolous or irrelevant. If they do, they must inform you of the termination within 5 business days.
- If a disputed item cannot be verified, it must be removed.
- The CRA must then provide you with a free copy of your credit report so you can confirm the item is gone.
- If the item can be verified, the dispute gets rejected.
- If this happens, the consumer has a right to include a 100-word statement in their credit report. This explains your dispute to lenders reviewing your report. However, the negative information would still affect your credit score.
While the FRCA creates the credit repair process, the Credit Repair Organizations Act regulates the credit repair industry. It’s the law that grants you the right to authorize a qualified third party to make disputes on your behalf. Basically, this means that you can hire someone to do the work for you, reducing the time and aggravation of repairing your credit.
Congress passed CROA in 1996 after consumer watchdog organizations like the FTC found high rates of consumer abuse within the credit repair industry. The law recognizes that consumers need to maintain a high score and have a right to seek assistance to correct their credit. It also recognizes the companies often make false or misleading claims or use abusive or predatory practices to create hardship for consumers who are already struggling.Regulations set by CROA
The main purpose if CROA is to define what companies or organizations have a legal right to provide credit repair services. Then it outlines how those services must be provided.
- The law defines a credit repair company as an entity that sells services related to maintain accuracy in a consumer’s credit report.
- This does not include financial institutions, lenders, credit card issuers or nonprofit organizations, such as consumer credit counseling agencies.
- There are five basic business practices that CROA strictly prohibits:
- Credit repair companies can’t make false statements about credit scores or how much their service can improve your score
- They can’t alter your identity or advise you to do so to hide negative information incurred on your report.
- They can’t make untrue or misleading claims about the services they provide.
- Companies also can’t engage in any practice that would constitute fraud under other federal laws.
- Finally, they can’t charge advance fees and must fully perform all services as you pay for them.
- A credit repair company must also provide a detailed disclosure of what their services do and how much it costs. They must give you this disclosure before you sign a contract!
- They can’t penalize you with fees if you decide to cancel
- It prohibits companies from making you sign away your rights to cancel or sue and protects your rights to seek damages if the service is not up to standards.
- It gives you the right to sue a company for up to five years after the service was provided.
In addition to the two federal credit repair laws, almost every state has their own credit repair laws, as well. Most state laws stipulate that a credit repair company must have a state-licensed attorney on staff. In other words, only a credit repair attorney authorized to practice in that state is legally allowed to make disputes on your behalf. This gives you an easy way to make sure that a credit repair company is legitimate. If they don’t have state-licensed attorneys for your state on staff, then buyer beware! The service may be a scam.
Some states require the company to be bonded to work for clients in that particular state. Other states establish more specific systems for when fees can be assessed and prohibited acts that credit repair companies can’t engage in without breaking the law. Disclaimers and disclosures that are legally required can also be set by the state, as well as standards for advertising and making claims during sales calls.
If you want to know your state’s specific consumer protections for credit repair, contact your state Attorney General’s office. They can provide information about your state’s credit repair laws and help you understand the legalese, so you don’t have to read the law yourself to know what rights you have.What to do if you think you’re the victim of a credit repair scam
If a company violates any of the rights outlined above or doesn’t follow the laws in your state, you have a right to sue and a right to file a formal complaint against the company. Here’s what you should do if you think a company didn’t follow the letter of the law and tried to scam you:
- File a complaint with the Federal Trade Commission at https://www.ftccomplaintassistant.gov/
- Then contact your state Attorney General’s office to file a complaint with that office as well.
Note that complaints made to the FTC don’t mean that they will help you sue the company. You usually must pursue a civil lawsuit on your own. The point of filing complaints is to get the company into the federal database of consumer complaints. If they receive enough complaints, then they go after the company with fines and possible business closure. By contrast, your state AG’s office may decide to file a class action lawsuit against a company if they receive enough complaints. But if you believe you’re the victim of a scam, don’t wait for your AG to act! Instead, talk to an attorney about pursuing a civil lawsuit on your own.
- What is Credit?
Many of us probably had a toy cash register growing up. Depending on when you grew up, however, that cash register may have included a play “magnetic swipe” for the toy credit card that came with the cash and coins. Even at a young age, we’ve been exposed to credit cards and the idea of credit. But really, what is credit?
This guide is designed to provide an introduction to credit, so you can understand what it is, how it works and how to use it strategically. If you still have questions, please feel free to Ask Our Experts.
The Basics of Credit:
Credit is essentially borrowing money from a bank or other establishment in order to receive goods. Years ago, people would go into grocery stores or other shops to pick up a few things here and there. At the end of the week, or the end of the month, the customer would pay back the business, who had been keeping track of the things they had purchased. This was credit in its most basic form.
Today credit usually comes in the form of credit cards and loans. You go into a store and use your credit card to pay for the items. By using a credit card, a bank is the one initially paying for the goods or services, and you are then paying the bank back at the end of the month. It’s the same process for a home or car. The bank or finance company puts up the money for the home or car, then you make monthly payments to them, usually with added interest, until it is paid off.
Types of Debt
There are many different kinds of credit out there, it all depends on what you want to use it for. The most important thing to think about is the kind of debt it is. Some types of credit may seem different but are essentially the same. When talking about overall credit, there are two main kinds of debts that are out there: secured and unsecured debt.
Secured debt is when you receive credit in exchange for something. You must either give something to the bank as collateral or have something that the bank can take from you in the event you do not pay off your loan as promised.
Some examples of secured debt are:
- Secured credit cards
- Home loans
- Car loans
With secured credit cards, you give the bank a deposit that serves as collateral. If you don’t make your payments, the creditor takes the deposit to cover the debt repayment.
Home loans are a secured form of credit. If you don’t pay your mortgage, the bank can (in most states) take your home and resell it. Think back if you can to the housing crisis at the start of the Great Recession, when all the homes that were in foreclosure or bank-owned properties that were being sold.
Car loans are another form of secured credit because cars are physical items that have value. If you don’t pay on your car loan, your car can be repossessed and given to the bank.
Understand that in all these cases, not paying or defaulting will result in major hits on your credit report.Unsecured Debt
Unsecured debts are credit that is given to you based on your creditworthiness. They essentially loan you the money with the expectation that you will pay it back, sometimes with interest. To qualify for most forms of secured credit and all unsecured credit, banks look at the “5 C’s of creditworthiness.”What are the 5 C’s of Credit Worthiness?
Most of the five C’s deal with your history of how you have handled money and loans in the past. This helps give lenders of an idea of the likelihood of repaying their money to them. Each bank has its own criteria woven into the 5 C’s. Lenders and creditors place different values on different areas, depending on their lending model. But these give you things to think about before you take out a new line of credit with a bank.
- Credit History/Character. A lender will look at various aspects to make an opinion about your character, including your credit history. While a smaller or local bank or credit union might care more about your character as a person and take references and your reputation into consideration before making a loan decision, a large bank will usually look at your credit history and your ability to pay back loans, and pay on time.
- Capacity. This is sometimes also viewed as “cash flow.” This is your ability to pay back the loan based on things including your annual income, your debt-to-income ratio and more. It is showing the bank you have the financial ability to repay the loan.
- Capital. This is often more for businesses, but it shows the bank how much money you or investors have invested in your business.
- Collateral. Much like a secured loan, a bank will look at what tangible items you have that can be leveraged in the chance you default on your loan.
- Conditions. These are outside factors that could impact your ability to pay back a loan. Things like the job market and even the business you are in could affect the kind of loan you get and how much.
With secured and unsecured debts, there are different credit terminologies that explain what kind of credit you are getting and how you will have to pay it back. This includes how much you need to pay each month and if that amount varies. Some types of credit include:
This is credit that is like a credit card or home equity line of credit, or HELOC. You have a set limit that you can borrow, and can borrow at will up to that amount, while either paying it back each month or making payments each month to pay off what you owe.
Installment credit or fixed loans
Examples of installment loans include car loans and mortgages, or house payments. You had a set amount of money that you borrowed that you have to pay back after a certain amount of time (usually years). The total amount you owe was divided into monthly payments with interest, and now you pay a set amount each month until the total loan is paid off. You can’t borrow more money from an installment loan.
Open credit vs. closed credit
Open credit is a credit line that you can borrow against as needed. Closed credit is a set amount you receive upfront. For example, a home equity loan is a closed credit line, because you receive a set amount of money once you’re approved. By contrast, a Home Equity Line of Credit (HELOC) is an open credit line. You can borrow up to a certain limit, but you don’t have to take out the full amount. Open credit usually has revolving payments, while closed has installment payments.
Now that we understand what credit is and what kinds of credit there are, how do we get credit?
Getting credit starts early for many people. Many parents put their children on their credit card accounts to create a positive credit history for them. Individuals who are also can also do this by being added to someone’s account as an authorized user.
If you have to start from scratch, it helps to have a bank account. While not part of your credit history, it can help regarding one of the 5 C’s of creditworthiness, — your character. If you have a bank account and automatic deposit with recurring income, you are also showing capacity.
Another option is to open up a secured credit card account that reports to the three credit agencies. You’ll need a down payment initially, but over time it will help you create a positive credit account (if you are paying it off each month and keeping your spending low) and create the opportunity to get more credit.
Other options when getting credit include cell phones and store credit cards. Both require relatively little credit to be approved or require a down payment if your credit is particularly thin. Again, the down payment is to secure the loan in the chance that you default. In the meantime, you should gain positive credit history from each of these credit lines you open or create.
A third option that can work is to have a co-signer on a loan. This can be a dangerous proposition for the co-signer, but beneficial for you if you make sure to pay the loan back. You and the co-signer are on the hook for the entire amount of the loan, and you don’t want to hurt the co-signer’s credit or their finances by not making good on your loan.
No matter which option you choose, it’s especially important to keep up on your monthly payments and to keep credit card balances at or near zero. This will positively impact one of the most important aspects of your credit report. Try setting up automatic payments with accounts so that you never miss a payment.
When you apply for new credit, make sure to look at the terms and conditions that you are agreeing to. Based on your credit score, what are your chances of being approved? How high are the interest rates? What are the payback terms? Will you be dinged if you try to pay off the loan early or pay more than what is due?
Make sure to read the fine print, which can be a lot, before every signing on a loan or opening new credit.
As you build your credit, the accounts accumulate onto a credit report. There are three credit reporting agencies that track your credit — Experian, TransUnion, and Equifax. Each bureau tracks when you apply for credit, when you get approved, and your payment history. Each agency also has its own algorithm that it uses to calculate your creditworthiness for other lenders.
Your credit report also shows how long you have credit for. All these indicators help lenders with their 5 C’s.
It’s important to keep your credit, and your credit reports, in good standing if you want to continue to be creditworthy and have access to new credit.
How to avoid credit problems / How to avoid abusing credit
Once you have credit, the most important part is maintaining it. With an installment loan, you must pay off at least the predetermined amount each month. That will keep the account in good standing while also paying down the loan.
The place where many people tend to get into trouble is with revolving credit or credit cards. When you have a larger limit of how much you can borrow, it can potentially lead you to spending more money than you are able to pay off each month, or within a reasonable amount of time. Your spending can quickly spiral out of control and lead you to monthly interest payments that exceed what you can reasonably afford to pay. You will wind up in credit card debt, and eventually bad credit if you can’t rein in spending and learn to budget.
If you do wind up in credit card debt, thankfully there are options out there that can help with credit repair.
Credit repair and debt management services can help you get your debt under control and create a system where you can repay your loans and rebuild your credit.
As you build up and maintain your credit, turn to Debt.com for information and advice on keeping a clean and positive credit history.
- How to Place a Credit Freeze
Credit card fraud is rampant these days. Ask almost anyone you know, and they have likely been a victim either through a data security breach or even a skimming machine that was attached to something where they used their card and didn’t know.
While skimming has decreased, thanks in large part to chip-and-sign technology, online fraud is everywhere. Even the credit bureau Equifax had a massive data breach that put 143 million Americans’ credit information at risk.
The danger in a data breach is not just that one credit card you might have that could be at risk, it’s that your entire financial and credit history could be compromised, or your identity stolen, because of your consumer data being leaked or hacked online.So, what is a consumer to do? Enter: The credit freeze.
Put simply, a freeze is like a lock on your credit, where no one has access to your credit history but you. If you want to give a company access to your credit history, you must have the “key,” which is a specialized PIN you give the credit agency. Once they confirm your PIN, they “unfreeze” your account to allow businesses and companies to view it.
For example, opening a new credit card, getting a new phone, buying a house, a car or most other major purchases, all require a credit check. If your credit is frozen, you would have to call each bureau to unfreeze your account to then apply for a loan or make a purchase. Under the old system, it could take up to three days and cost up to $30 in total once you contact and pay each bureau.
Back in 2003, when most of us thought the most egregious thing you could do on the internet was download pirated music, the state of California passed a law that allowed consumers to place a block on their credit reports with each of the three credit bureaus. It was the first state to do so, and it took years for credit freezes to take hold in most states.
Credit companies and automakers didn’t like the idea of credit freezes because it limited a consumer’s impulse buying privileges. If a buyer’s credit was frozen, they couldn’t on a whim go into a dealership and purchase a car because they wouldn’t be able to run their credit in order to finance a purchase. If they were shopping, they couldn’t open up a credit card at the register and save 10 percent. These businesses fought off the idea of credit freezes in state legislature through lobbying. But they eventually lost the fight. Because it was handled on a state-by-state basis, each state created their own rules and stipulations. Some states offered free credit freezes and unfreezes to everyone, while others charged a fee of up to $30, or $10 for each freeze or unfreeze. Most states did offer free credit freezes to individuals who were directly impacted by credit fraud or identity theft. However, the individual would have to show more than just that their information had been stolen. Consumers were usually required to show that their identity or credit had been used to make purchases or open new accounts. The onus was on the victim, who had to file a police report and submit that as proof to receive the free credit freeze.New Credit Freeze Law in Effect Starting September 2018
As identity theft hit a new high in 2018, a new law was passed called the Economic Growth, Regulatory Relief, and Consumer Protection Act. Among some of its other regulations, it states that all three credit bureaus must offer consumers credit freezes for free. According to a 2018 study by Javelin Strategy and Research, more than 16.7 million individuals were victims of identity fraud in 2017, an increase of 8 percent over the previous year. Javelin defines identity fraud as not just access to your information, such as via a data breach, but using that information for financial gain. Hackers and fraudsters have gotten more sophisticated, which makes the ability to easily freeze your credit report even more important. Part of the reason the law even came to fruition was the result of Equifax’s major credit breach that left so many vulnerable to identity fraud.
“There’s so much happening today in terms of data breaches — and there’s an importance to insuring people are able to access information about them,” says Rod Griffin, director of public education at Experian.
“This federal law makes things more streamlined, makes it uniform across the country and easier for people to understand how it works,” he says.New free child credit freezes
The new law will not only allow free credit freezes but the ability to freeze your child’s credit report as well.
“Child identity theft is on the rise,” says Griffin. He explains that a child shouldn’t have a credit report at all, and if they do, parents should look into why. Experian offers a one-time service where people can look into whether their child has a credit report. If you happen to find something, they also provide free credit help, as well.
“For children, on average, the victim is about 12 when the fraud occurs, and they don’t find out until they are 16 or 18 years old when they are applying to financial aid and need credit,” he says. This is usually after the damage is done.
If your child does happen to have a credit report, you can have it frozen, or you can even have a credit report created and frozen if you desire, Griffin says.
Another benefit of the new law is the ease of creating a credit freeze. Each agency will have a web page on its site allows you to upload verification and set up a credit freeze immediately. This kind of technology also means you can unfreeze it quickly as well.
“You’ll initially be issued a PIN number. Once you provide the PIN and we can match the identity, we can lift that freeze almost instantly,” Griffin says. At most, it should take about an hour or two.
Another part of the law is an extension of a fraud alert from 90 days to a whole year. A fraud alert differs from a credit freeze because it is not as strict. While a freeze stops anyone from accessing your credit without your permission to the credit bureau (through unfreezing), a fraud alert still gives companies access to your credit files. But it prompts them with an alert, asking them to have you answer select questions about yourself. They must ask you to confirm something like your phone number or address to verify your identity. Usually, a credit freeze will last either until you unfreeze it or for seven years based on the state in which you are in. But a fraud alert is only temporary.
Some credit agencies now offer a premium service that uses a mobile app to freeze and unfreeze your credit without the use of a PIN. These services are called credit locks, which is somewhat confusing because a credit freeze is essentially a lock. Again, the difference here is in the ease of use, and a mobile app makes it much easier to “lock” and “unlock” your credit file almost instantly.
Each credit reporting agency, Equifax, Experian and Transunion, has a different system for freezing and unfreezing your credit file. You have the option to call or write in by mail to have your credit frozen. Credit bureaus have also now introduced online freezes, which make the process much faster.
For written freezes, you may have to mail in documents, including copies of your driver’s license, passport, Social Security number and more. Then they will mail your PIN number back to you.
For phone calls, you will need to give your Social Security number and address.
For Experian credit freezes, you’ll need to know the addresses you’ve lived in for at least the past two years. This can get tricky, especially if you are in college and move frequently, so keep that in mind. With all freezes, you’ll need your name with any suffixes, Social Security number, and birthdate.
PO Box 9554
Allen, TX 75013
- If you choose to overnight your documents for your credit freeze, mail to:
711 Experian Parkway,
Allen, TX, 75013
- Experian number: 888-397-3742
- Experian online: https://www.experian.com/freeze/center.html
To freeze your credit with Equifax, you’ll need your name, including any suffixes, your address, your Social Security number and date of birth. You may also need additional documentation, especially if you are mailing your information in.
Equifax Information Services LLC
P.O. Box 105788
Atlanta, GA 30348-5788
- Equifax number: 888-548-7878 or 888-298-0045 800-685-1111 (in New York, call 800-349-9960)
- Equifax online: https://www.freeze.equifax.com/Freeze/jsp/SFF_PersonalIDInfo.jsp
Whether online or by phone, Transunion may ask you identification questions that include past addresses or even payment amounts on loans, so be prepared before you set up your freeze. Transunion also has many other products on its site that are not free, so be watchful to make sure you are signing up for a freeze only.
P.O. Box 2000
Chester, PA 19016
- Transunion number: 888-909-8872
- Transunion online: https://freeze.transunion.com/sf/securityFreeze/landingPage.jsp
“You shouldn’t freeze your credit file if you think it’ll prevent identity theft,” Griffin says. “It won’t. We don’t want to create this false sense of security that you don’t have to worry about your information anymore because your credit file is frozen.”
Griffin explains that most ID theft happens involves account takeover, where someone steals your credit card number. “Stealing doesn’t trigger a freeze,” he says. “It’s in the event that someone steals it and tries to apply for new credit.”
In other words, if you have a card that’s compromised, a freeze won’t prevent fraudulent charges. However, if someone gets their hands on your Social Security number, having a freeze in place will stop them from opening new credit in your name.
You also need to keep in mind that you’ll need to unfreeze your credit anytime you apply for new credit. And given that it still takes 1-2 days to unfreeze your report, you won’t be able to apply for credit impulsively. So, if you’re in a checkout line and they offer incentives to open an account, you wouldn’t be able to take the offer.
“Opening new credit on impulse because it’s offered at checkout doesn’t give you time to thoroughly review the account and its features. You could end up with an account that has things like high APR or deferred interest. So, credit freezes can be beneficial, because it forces you to take time to consider a new credit line before you open it.
- How to Build Credit without a Credit Card
Have you heard people talking about how to build credit before? Building credit generally refers to any steps that you take to achieve a higher credit score. You need to know how to build credit when:
- You’re just starting out and have no credit
- You need to attain a higher score to qualify for financing at good interest rates
- You’re rebuilding your credit score after a period of financial distress that damaged it
The process to start building credit in all these situations is largely the same. If you follow the steps that we outline below, you can get the score you want. Even better, you don’t necessarily need to shell out any money to do it.How to build credit: The best way step-by-step
- Download your credit reports
- Review your reports to find errors and see where you stand
- Dispute any credit report errors to have them removed
- Get a secured credit card or small personal loan
- Gradually take on more credit
By federal law, every credit user is permitted to download a free copy of their credit report from each credit bureau. You can do this once every twelve months. So, you can check your credit report for free once per year. This is the crucial first step in building credit effectively.
The government-mandated website for downloading your reports is: www.annualcreditreport.com
That’s not our website or some company trying to sell you credit monitoring services. Just go onto the site, answer a few security questions to prove you are you and you can download your reports. You have one credit report from each credit bureau.
- If this is the first time you’ve checked your credit, download all three. That way, you can check to make sure all your reports are correct.
- If you’ve checked your credit before, you may want to only download one. That way, you can space out your report downloads to check your credit throughout the year.
If you’ve haven’t read a credit report before, head over to Debt.com’s articles about Understanding Your Credit Report. Basically, there are two things that you need to note in your reports:
- Errors or mistakes in the information listed
- Negative information that’s correct, which drags down your score
For the most part, you want to focus on the negative items that should be highlighted on each report. If you don’t see any negative items, that’s good news! It means that you probably don’t have a bad credit score, you just have a weak credit score. If you follow steps 4 and 5, you should be able to build a better credit score in about six months to one year.
If you have negative items, they’ll either be mistakes or legitimate penalties that you incurred. Step 3 covers the mistakes, while Steps 4 and 5 will help you offset the legitimate penalties faster.
Highlight or write both types of issues to set up a basic roadmap of what you need to overcome to achieve the credit you want.
According to the Fair Credit Reporting Act, credit bureaus are legally required to remove any information that can’t be verified. To ask them to remove the item, you submit a credit dispute. They have 30 days to verify the item with the creditor or lender. If it can’t be verified then they must remove it and give you a fresh copy of your credit report showing the correction. This is a process known as credit repair.
If you’ve heard that term before and think it’s a scam, blame the players, not the game. Credit repair, as a service, if fully legal. You just have to work with a state-licensed attorney that you authorize to make disputes on your behalf. However, there are companies that offer credit repair services that either encourage to skirt the law or aren’t authorized to make disputes because they don’t have state-licensed attorneys on staff. These are scams.
Still, don’t get confused that credit repair, itself, violates the law. It’s completely legal. It can also be completely free if you do it yourself. You can find instructions for making disputes in Debt.com’s Step by Step Credit Repair Plan.
Correcting your credit report allows you to maximize your score as much as possible before you focus on building credit. The next step is to start working towards the score you want. For that, you need debt to pay off. That’s because in the world of credit, no action is just as bad for your credit as negative actions.
So, you need to take positive actions that will help you build up to the score you want. In order to do that, you get a secured credit card or take out a small personal loan. A secured credit card is a revolving credit line you open with a small cash deposit. You can get one of these cards regardless of your credit score. This allows you to open a small credit line that you can easily manage. You make charges every month, then pay the balance off in-full every month.
This strategy allows you to build a positive payment history, which is the single biggest factor used to calculate your credit score. Paying the balance off in-full also keeps your credit utilization ratio at zero. That’s the second biggest factor in credit score calculations and lower is always better.
If you don’t want to get a credit card because you’re trying to avoid debt problems, get a small loan. Loans tend to be easier to manage because they have lower interest rates and fixed monthly payments. You can use the funds to renovate your home, make a large purchase, take a vacation or even make an investment. Paying the loan back has the same positive impact on your credit that paying off a credit card has.
Applying for too many credit lines or loans within a six-month period hurts your credit score. It also takes on too much debt at once, so you can struggle to make your payments. So, you must take on new credit gradually.
After about six months of making payments on the secured credit card or loan, apply for a new line of credit. Only do this if you can afford it! So, review your budget and make sure you can afford the extra payments.
You can add another small loan or credit card. Even in-store credit lines to purchase furniture or electronics help you build credit. Just avoid the following:
- Prepaid credit cards
- No credit check loans or credit cards
- Payday loans
These types of credit don’t require credit checks, so it’s easier to qualify. However, they also don’t affect your credit score. For instance, a prepaid credit card functions more like a debit card than a credit card; so, it doesn’t count towards your credit payment history.
As you take on more credit and continue making all your payments on time, you will gradually build credit until you achieve the score you want. If your FICO score is below 600, you should see improvement within the first six months to one year. Once you get above 700, it takes more work to move the needle in a positive direction. Just don’t take any negative actions, because they will set you back quickly!Finding the Best Way to Build Credit for Your Situation
As you figure out how to build credit in the quickest way possible, there are certain actions that you want to avoid . These actions either damage your score or break the law. Here’s what you need to know…#1: Use a fake Social Security number to start a new profile
Some credit repair scammers tell you they have an instant quick-fix solution to getting away from bad credit. They tell you all you need to do is use a different Social Security number to start a fresh credit profile. This is very, very illegal. It amounts to Social Security fraud, which is a criminal offense that can even lead to jail time.
If a credit repair company tells you to do this, run. Then report them to the FTC.
A variation of the scam listed above is to start a new credit profile as a business. You use an Employer Identification Number (EIN) to start a new profile and apply for credit lines. You’re basically impersonating a business. This is also very, very illegal and can result in criminal prosecution for fraud.
Just to be clear, there is no legal, quick-fix solution to go from a 500 FICO score instantly to 800. It takes work and time to build credit. Don’t break the law trying to get there faster!
As we mentioned above, the single biggest factor used to calculate your credit score is payment history. That makes missed payments incredibly bad when you want to build credit. One missed payment now can set you back significantly. And it’s much worse than having a few missed payments in the past.
The “weight” of negative credit items decreases over time. So, a missed payment last month has a bigger impact than a payment missed seven years ago. (Seven years is when missed payment penalties expire and drop off your report.)
So, it’s not like you can miss a payment and offset that damage with one positive payment. It will take many positive payment records to offset that one mistake. This is why you want to add credit slowly to ensure you can always keep up with the payments.
It’s important to note that a missed payment is any payment made more than 30 days late. A late payment that you pay within that billing cycle should not get reported to the credit bureaus. They only report missed payments at 30, 60, 90 and 120 days past due. Still, avoid paying late, since that leads to fees and penalties.
“Credit utilization” is the second biggest credit score factor. It measures how much debt you have versus your total available credit limit. So, if you have two credit lines at $500 each, your total credit limit is $1,000. If you have a $250 balance between the two cards, your utilization ratio is 25%.
Lower credit utilization is always better. Anything below 30% is considered “good” for this factor. However, lower is even better. And the idea that you must keep balances on your credit cards to have a good credit score is a myth. If you’re trying to figure out how to build credit the fastest, paying balances in-full actually provides the best utilization ratio possible.
By contrast, running up balances and maxing out your cards is bad for your credit. If your debt ever gets higher than 50% utilization, seek debt relief immediately.
Always remember that a credit score is a number that measures your risk as a borrower. So, any actions that make you a high-risk borrower will lower you score. Taking on too many credit lines in a short period of time makes you a high risk because there’s a question of whether you’ll be able to afford the payments.
This is why you really want to only apply for one credit line at a time. Ideally, credit applications should be spaced out by about six months.
“Credit age” is a smaller factor used to calculate your credit score, but it still counts. Basically, a longer time using credit makes you a lower risk because you’ve proven you can manage credit and debt long-term. So, old accounts that you’ve kept in good standing are good for your credit.
But this means that closing old accounts can actually hurt your credit score. Keep those accounts open and in good standing to avoid unintentionally damaging your score.
This relates to the previous subject. If you don’t use an account for a long time, the creditor may close it due to inactivity. This would have the same effect as closing the account yourself. It still decreases the “age” of your credit history.
With that in mind, you can’t just keep accounts open and not use them to build good credit. If you have an old account in good standing, find a modest use for the card. Choose something you can pay off in full every month. For instance, use it to cover groceries, gas or a recurring expense like tolls – something that’s in your regular budget that you need to cover anyway. That way, you can use the account and pay it off every month using the cash flow that would have covered that expense.
We specifically focus on medical bills, because if you’re keeping up with the payments on all your other debts, collections shouldn’t be an issue. However, gaps in insurance can often lead to out-of-pocket medical costs that you don’t know you owe. It happens pretty often. People think insurance covers an ER visit or other expense, but their insurance doesn’t all or part of it. The bill goes unpaid and ends up in collections. As a result, it ends up in your credit report.
Any collections account will be bad for your credit, so you want to avoid them overall. However, medical bills can be that thorn in your side that slips through and ruins all your hard work. Make sure to stay on top of medical costs and make sure they’re paid by your insurance. Otherwise, you can set yourself back significantly with this mistake.
Collection accounts aren’t the only public record that can negatively affect your credit. Any debt you owe as a result of a court ruling will create a public record that appears in your credit report. This includes criminal or civil court fines, as well as things like unpaid alimony or child support.
This means you can’t ignore your civil obligations to focus solely on paying debts to build credit. In other words, don’t stop paying child support while you build credit! If you can’t afford both, either scale back your credit use or ask the court to adjust your payments.
Another way to incur debt that will appear on your credit report is to fail to pay your taxes. If you owe back taxes and the IRS places a lien on your property, this shows up in your credit report, too. In fact, an unpaid tax lien is the worst credit penalty you can possibly incur. It’s even worse than bankruptcy or foreclosure!
By law, penalties can only remain on your credit for a set period of time. Most penalties like missed payments and even foreclosure only stick around for seven years. Bankruptcy penalties remain for up to 10 years, although the credit bureaus remove Chapter 13 after seven. By contrast, federal law states that an unpaid tax lien can remain indefinitely. Some bureaus will remove the penalty after 15 years. But that’s still much longer than other negative actions.
So, don’t dodge the IRS because it will be bad for your finances and your credit.One last note about how to build credit when you have defaulted federal student loans…
If you have federal student loans that slipped into default, they damage your credit just like other defaulted debt. However, repairing that damage is easier with federal loans. There’s a special exception for credit damage caused federal loans in default. If you make six consecutive payments on time on a defaulted federal loan, it becomes current. Even better, the credit damage and negative items caused by the default disappear. It’s basically like you never defaulted in the first place.
This special rule only applies to federal student loans. So, an easy additional way to boost your score if you have federal loans to repay is to focus on making the payments on those loans for six months. The loans become current, the negative items disappear from your report, and you can continue building credit from there.
It’s important to note that bringing your federal loans current using a Federal Direct Consolidation Loan does not have the same positive impact on your credit. Another special rule of bringing defaulted federal student loans current is that you can instantly bring them current through consolidation. But while this removes the defaulted status, it doesn’t remove all the missed payments from your credit report. So, the damage remains. Consider your options carefully and consult a student loan resolution specialist if you have defaulted loans.
When a credit repair company begins working for you, they immediately pull your credit report from all three credit bureaus (Equifax, Experian, and TransUnion). The team reviews your reports to identify potential mistakes and errors. This can take a few days to complete, as they look for things like mistakes in the credit history, duplicate accounts and expired negative items that should no longer appear.
If they identify errors on any of your reports, they’ll collect any documentation that you have, which will support your dispute. Once they have the documentation, they send it to the three bureaus and work with them to determine if the item or items should be removed from your credit report.
The best credit repair companies review all three reports from the different bureaus because they might not all contain the same information. Each credit reporting agency has its own “data furnishers.” That’s what many industry experts call banks, credit unions, savings and loan institutions, mortgage lenders, and credit card issuers. So, if each report is not reviewed, errors could be missed.
To be clear, there’s nothing that credit repair companies do that you can’t do on your own. Everything a credit repair company can do for you, you can do yourself for free. However, doing the work on your own can be a lot of work. You also may not have as much success making disputes yourself, which means negative information may remain and continue impacting your score. Going through a professional credit repair service often increases your chances for success.Can a Credit Repair Company Really Help?
In a word, yes. They employ a staff of attorneys that are licensed to work in all states or only provide services in one state. These attorneys understand the nuances of the trade and the law. Their experience makes them more effective when they’re negotiating with your lenders on your behalf. They also apply the provisions within federal consumer protection laws to help you improve your credit history.
The top credit repair company will help you to:
- Comprehend and evaluate your credit reports
- Understand how your credit scores are determined
- Identify strategies that will continually boost your credit standing
But let’s make one thing clear, credit repair may or may not improve your credit score. You hire these companies with the idea that they will delete any mistakes on your credit report. And, unfortunately, mistakes can be rampant.
A congressionally mandated study found that one in five consumers had an error on at least one of their three credit reports. Howard Shelanski, Director of the Federal Trade Commission’s Bureau of Economics, says:
“These are eye-opening numbers for American consumers. The results of this first-of-its-kind study make it clear that consumers should check their credit reports regularly. If they don’t, they are potentially putting their pocketbooks at risk.”
The study also found that one-in-four consumers found errors that could negatively impact their credit score.
You may have decided that you’d rather employ a credit repair company instead of taking the free credit repair option and doing all the work yourself. But you have questions – almost every person does. For instance, how can you tell if a business is legitimate or some front for a scam artist? And, are the services affordable? Let’s find out.5 Things the Best Credit Repair Companies Won’t Do
There are certain things you should be looking for when investigating credit repair companies and scammers. Legitimate companies won’t do the following five things:
- Ask you for payment upfront before they start any work for you
- Request that you don’t contact the credit reporting companies directly
- Advise you to dispute information that’s accurate in your credit report
- Tell you to provide phony information on your applications for credit or a loan
- Forget to review your legal rights when they explain their services
If you recognize these red flags, or if the company promises that it can increase your credit score by 100 points or more, they’re running a scam. If you spot a scam, you can report it to the State Attorney General or the Federal Trade Commission.
Here’s a quick fact for you: The Better Business Bureau rarely accredits credit repair companies due to concerns of the high instance of fraud in the industry. Only the best gets the BBB seal of approval.How Much do Credit Repair Companies Charge?
The rate a credit company charges really depends on the services you require or request. Some of the services provided in a comprehensive program may include:
- 3-bureau credit monitoring
- Fraud protection and alerts
- Credit score monitoring and alerts
- Credit score simulators and credit coaching
- Housing counseling and mortgage lender referral
- ID theft insurance
- Financial coaching and education
For this package you could be paying anywhere from only $30-$100 a month, with a setup fee ranging from $15-$90. The cheapest credit repair cost occurs when you fix your credit yourself. That option costs around $30 – but you do all the time-consuming work yourself. Software for guidance on credit repair begins at $30 – but you don’t get much for your money. More comprehensive software packages range from $199-$399 – these platforms often set alerts to track dispute progress and sometimes lead you to certain templates to use; they can even autofill those templates in some cases.
Before you sign anything or buy anything, read the contract and ask questions about the rates and services. Offers that sound too good, are usually trouble.
Getting your credit report and checking it for errors should be on your “to do” list. If you don’t, these errors could stay on for years and lower your credit score. This will make getting loans or a credit card with affordable rates nearly impossible. And now that you know how to spot a legitimate credit repair company from a scam, don’t hesitate any longer – contact a credit repair company today. They could make the difference between a healthy credit history and one plagued with negative information.
Negative items appear on your credit report for two reasons:
- You did something that creditors consider bad, like miss a payment or declare bankruptcy.
- There was a mistake in reporting, either by the original creditor, collector or credit bureau.
If the item is a mistake, then you need to go through credit repair to dispute it with the credit bureau. They have 30 days to verify the information is correct. If they can’t then it must be removed.
But often times, the negative information in your report is legitimate. In other words, you really incurred the penalty and the information is correct. If so, then there aren’t many legal options for how to get something bad off your credit report. You usually just need to wait it out and take steps to build credit in the meantime. Following up after the clock runs out , even if negative items are legitimately earned, you must make sure they only affect your credit for the allotted time. You basically need to follow up by reviewing your credit after the item should expire. Then you check to make sure it no longer appears.
So, let’s say you missed a payment in June 2011:
- The creditor would only report the missed payment to the credit bureaus once it was 30 days late.
- That means the missed payment got reported in August 2011.
- Missed payments stay on your credit report for seven years from the date they were reported.
- As such, the last month it should appear on your credit report is August 2018
- Thus, you should check your credit report in September 2018 to make sure the missed payment item is gone.
This shows you how long a negative item can stay on your credit report:Positive items in your credit report
That covers all the negative items that can appear in your credit report. But there are also positive items in your credit. Those generally stay longer. In fact, neutral or positive credit report information can remain indefinitely. However, to keep credit reports manageable, the credit bureaus remove information after a certain amount of time.
Some financial tools can make all the difference between just getting by and actually succeeding. Credit monitoring services definitely fit that bill. They are not necessary to your everyday financial stability, but they can make all the difference if you’re trying to achieve an excellent or even good credit score.
Credit monitoring refers to any tool that tracks changes in your credit reports and/or credit score. Most tools include both. A credit monitoring service alerts you to changes in the information contained in your credit report. In addition, it also tracks your credit score, so you know exactly where you stand.
The best credit monitoring services monitor all 3 credit reports and your credit score. In most cases, the score it tracks is the VantageScore 3.0 or the scoring model from a specific credit bureau. Experian, Equifax and TransUnion each have their own scoring model. VantageScore was a model created by all three to compete against FICO. That’s the credit score used in 90% of financing decisions.
Learn more about what monitoring is »
- First, you sign up for the service by providing basic personal information, like your name and Social Security number
- You must provide your Social Security number for a credit monitoring service to work, since your credit reports are directly tied to your SSN.
- Once your account is set up, the system will flag anything that it thinks you should note in your credit report
- 3-in-1 credit monitoring services give you updates on the three reports you have (one from each credit bureau)
- You review the information it flags and act accordingly
- If you believe a negative item that the tool flagged is an error or mistake, you go through credit repair.
- After the initial review, the service alerts you whenever there’s something new you should note in credit profile. It also notifies you to increases or decrease in your credit score.
- Many credit monitoring tools also add other services. Some offer a score estimator that can show you how certain actions will affect your score. For instance, if you plan to get a debt consolidation loan, it will indicate whether that move is good or bad for your credit.
- Monitoring services also have features that provide identity theft protect. These tools alert you to potentially fraudulent activity, such as accounts you did not authorize. Some also come with identity theft insurance, which covers out-of-pocket costs related to addressing suspicious activity.
Learn more about how credit monitoring works in certain situations »How to choose the best credit monitoring service
The level of monitoring that you want depends on your needs and goals. Paid credit monitoring services tend to offer more comprehensive coverage. They provide 3 bureau credit monitoring so you can see the reports from all three bureaus with one tool. In addition, they usually give you a certain number of free reviews of your full report per year. This allows you to review your reports more often than the once per year you can do it for free. Some just give you one extra review, some do it quarterly and the most expensive offer it monthly.
The services also differ in which credit score they track. FICO credit score tracking through any third-party tool is rare. You usually must pay FICO directly for FICO score tracking. In most cases, you want to go for a service that tracks VantageScore 3.0. That score tracks the same scoring factors as FICO and has the same range from 300-850. It often provides the best approximation of your FICO score without the added price of paying FICO.
If you don’t want to pay for monitoring, you can use a free credit monitoring service. These come from credit monitoring companies like Credit Sesame and Credit Karma. With these free monitoring services, you usually don’t get your full report. They focus predominantly on just your score. They tell you what items in your report could be contributing to a lower score. Then you can act based on that information. For example, if a free credit monitoring service tells you that you score is low because your credit utilization is too high, you can focus on paying off credit card debt.
Each of the credit bureaus offers its own private credit monitoring service. For instance, you can get TransUnion credit monitoring or Experian credit monitoring. This only tracks information from that bureau’s credit file. They generally also only provide credit score tracking for their proprietary credit score. So, with TransUnion monitoring it would track your TransUnion credit score.
Most people became familiar with monitoring services following the Equifax data breach in 2017. Equifax’s records were compromised for 143 million American consumers. Considering the last census data put the total U.S. population at 323.1 million, this basically meant that over 40% of all consumers were affected.
Any service that works with your sensitive personal information carries some risk. Your credit file contains your Social Security number, account numbers and other personal information. A third-party credit monitoring company like LifeLock and Debt.com’s own Identity Theft Protection always maintains the highest standard of security measures, because that’s their bread and butter. A breach wouldn’t be good for business, so they take every step possible to ensure your records are kept secure.
Still, that’s not to say that there’s no risk. However, the Equifax breach proved one thing – no matter how careful you are, you can get away from the risk of ID theft. There’s no way to opt out of credit reporting with the credit bureaus. You can’t tell Equifax to stop reporting on you. So, the information is already out there, whether you want it to be or not. This means you’re better off monitoring your credit comprehensively than leaving things to chance. And with 3 in 1 credit monitoring, you get the full picture. This avoids potential theft from falling through the cracks, because you’re using Experian credit monitoring and something happens on your TransUnion credit report.
You can use the following checklist to identify the top credit monitoring services to fit your needs:
This checklist will help you narrow down your search for a monitoring service, so you can track the credit score and reports that you want with the added features you need.
Credit monitoring services are pretty notorious for “charging you on the down low.” They are the services that offer you a free credit score. To get your score, you have to sign up to get credit monitoring using your credit card information. But the “free” only gets you one score and a free trial period that usually lasts for 30 days. If you don’t cancel the service, they automatically charge your credit card.
Now, there’s nothing wrong with a free trial period. You can use it to make sure you chose the best credit monitoring service for your needs. But you need to go into that trial fully aware of what it is. Otherwise, you can get credit monitoring services you don’t want when you were just trying to get your score.
Some people think that monitoring your own credit will actually hurt it. It doesn’t. If you use a credit monitoring service with a score tracker, you can check your credit as often as you like. It won’t affect your credit score at all.
The main goals of credit monitoring are to maximize your credit score and help prevent identity theft. So, monitoring is good for credit repair and identifying fraud. But not everything that’s negative in your credit history falls in those two categories. For example, if you missed a payment by more than 30 days, the creditor reports this information to the credit bureaus. This creates a negative item in your credit report that sticks around for seven years. That’s a legitimate negative item and in most cases, you’re stuck with it until it expires.
So, don’t think that a credit monitoring tool can instantly help you clear out all negative information from your credit report. It can’t. Just like third-party credit repair services can’t magically erase all negative items. Any service that claims to provide the ability to instantly fix your credit is a scam!
Before you sign up for any service, make sure to check out the provider online. Make sure the company is rated by the Better Business Bureau; they should maintain an A rating or higher. You can also check out reviews on independent third-party review websites. Never believe the testimonials from the company, since they’ll only show you their top credit monitoring reviews. You can also check things like consumer reports and the rip off report, to make sure you’re not signing up for a scam!
The 10 Best Tips You Can Use to avoid future problems :
Here are 10 suggestions you can take to help protect yourself.
1. The next time you order checks, have only your initials (instead of your first name) and last name put on them. If someone takes your checkbook, they won't know if you sign your checks with just your initials or your first name, but your bank will know how you sign your checks.
2. When you are writing checks to pay your credit card accounts, DO NOT put the complete Account number on the "For" line. Instead, just put the last four numbers. The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through all the check processing channels won't have access to it.
3. Put your work phone number on your checks instead of your home phone. If you have a PO Box, use that instead of your home address. If you don't have a PO Box, use your work address.
4. Never have your Social Security number or driver's license number printed on your checks. You can add it if it is necessary. But if you have it printed, anyone can get it.
5. Place the contents of your wallet on a photocopy machine. Do both sides of each license, credit card, etc. You will know what you had in your wallet and all of the account numbers and phone numbers to call and cancel. Keep the photocopy in a safe place. It's also a good idea to carry a photocopy of your passport when traveling abroad.
6. For couples or friends traveling together - each of you should carry a different, unique credit card. For example, one of you could carry a Visa card and one of you a Discover card. Don't both carry the same credit card! That way if one of you has their credit card stolen, you still have a valid credit card to use and aren't completely without funds while you are traveling.
7. Another tip for couples or friends traveling together - each of you should carry the other person's photo copies of their credit cards and passport. If someone steals your wallet or purse, your traveling companion still has copies of all your information.
8. When you're reading email, don't click on any of the links listed in the email message. No matter how tempting the offer is! This is a way 'phishers' use to direct you to their website and capture your credit card and Personal Information.
9. We are told to cancel our credit cards immediately. But the key is having the toll free numbers and your card numbers handy so you know whom to call. Keep these numbers where you can find them separate from your credit cards.
10. File a police report immediately in the city where your credit cards, purse or wallet were stolen. This proves to credit providers you were diligent, and this is a first step toward an Investigation.
11.Statute of Limitation on Debt :
Depending of the states that you are in , credit repair businesses must be knowledgeable about the statute of limitation governing debt in New Jersey as en example . The statue of limitations essentially limits the time that a creditor can legally sue a consumer for payments for a debt. Statutes of Limitation (SOL) do vary by state and debt type. In general, it is usually between 3 to 6 years, but sometimes longer.