Credit restoration isn’t a simple or overnight process. However, contrary to popular belief you’re not locked in less-than-perfect credit prison for seven to 10 long, expensive, and embarrassing years.
Nor are you alone. Did you know most American’s would rather tell you how much they weigh, than their credit score? And it’s not as though America is considered a slim country.
Regardless, of how you came to have a bad credit score be it a divorce, illness, job loss, or your unique lemons in life, there is hope. You see, your credit score is a lot like your Grade Point Average (GPA) in school days bygone.
With your credit report acting like your report card. Because your FICO credit score, the most commonly used credit score, is determined based upon the information contained within your respective credit report with Experian, Equifax, and TransUnion.
As such, generally speaking, the negative items on your credit reports like: late payments, charge offs, debt in collections, or any other derogatory item is going to drag down your credit score. Likewise, the positive items, the accounts in good standing, will help to improve your credit score.
Legal Credit Repair
Legal credit repair is going to use your rights as a consumer to fix your credit score. The two most powerful pieces of federal legislation include the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA).
We’ll be sharing much more in detail coming up, but in short, the FCRA enables you to challenge and dispute items on your credit reports. This is how to clear credit report negatives and legally.
While the FDCPA, clearly says how collection agencies can operate. It’s the regulations for the debt collection industry. And much like our drug laws, it’s violated virtually every day, and with practical immunity.
5 Credit Score Components
First, let’s discuss your credit score. There’s, of course, the FICO score, also known as Fair Issac Corporation. This is the most commonly used credit score. And you have more than one FICO score.
You have a FICO credit score for each of your three credit reports. Then there are also industry-specific FICO scores. For example, if you’re in the process of buying a home, that FICO scoring algorithm may look and weigh specific items on your credit reports, slightly differently.
There is also the VantageScore, this was created in 2006, as a joint venture between all three of the major credit bureaus (Equifax, Experian, and TransUnion). This scoring model isn’t as popular and for our purposes here, we’re going to focus on your FICO scores.
With your FICO credit scores, they’ll use five areas or components to calculate your credit score. We’ve listed these five areas below, along with their respective weight. In other words, how much each area will influence your FICO score.
1. Payment History
Your payment history is worth the most at roughly 35% of your FICO score. This looks at all the positive and negative information on your credit reports. This is where any negative items will be counted, along with your accounts in good standing.
2. Amounts Owed
Your amounts owed category is worth about 30% of your FICO score. This is also known as your utilization ratio. And yes, it is looking at how much debt you have.
But, and this is big, it’s not going to hurt your FICO score if you have significant debt in the form of student loans, mortgage, even auto loans. The takeaway is with revolving lines of credit.
For example, with an unsecured credit card. If you have a limit of $1,500 and your monthly balance is $1,459 then your available and unused credit would only be $41. Compare that with the fella with the same credit card and only a monthly balance of $300, and thus $1,200 of available unused credit.
The fella with only a $300 monthly balance would naturally appear to be in a more secure financial position, than the fella who’s credit card is basically maxed out. It makes sense. And the takeaway is you want to display available, unused credit on any revolving lines of credit.
3. Length of Credit History
Your length of credit history is worth about 15% of your FICO score. And this is looking at the age of each specific account on your credit reports, along with big picture, how long you’ve been using credit.
The idea is the older each account is, and the longer you’ve been a user of credit, the better. However, this is not a category worth investing your efforts in, with normal use you’ll be fine.
4. Credit Mix
Your credit mix category is only worth 10% of your FICO score. And this is looking at what types of credit do you have and use?
The idea here is the more diverse your types of credit, the better. For instance, do you have a credit card? Mortgage? Auto loan?
5. New Credit
Your new credit category is only worth 10% of your FICO score. Naturally, this is looking at how often you’re applying for financing. With normal use, you’ll be fine.
How To Restore Credit
Now, let’s get to the meat and potatoes and discuss exactly how to restore credit. You can do this yourself, and many folks will get professional credit score help in the form of a credit restoration service.
The most effective, and efficient way to repair credit is by taking a multi-faceted approach. Focusing on improving your amounts owed credit score category by showing available and unused credit on revolving credit lines.
Along with working to clean up credit report negatives, errors, and derogatory items. Let’s first discuss how to deal with debt collectors, because chances are you’re currently receiving the obnoxious phone calls and demanding letters.
How To Deal With Debt Collectors
As we shared the FDCPA is the federal legislation designed to regulate this industry. It lays out some clear guidelines, and it’s violated every single year.
In fact, the debt collection industry is one of the leading complaints at the Consumer Financial Protection Bureau (CFPB). If you feel your rights have been violated the CFPB is who you should contact, along with the Federal Trade Commission (FTC) and if you’d like your local state’s Attorney General’s office.
The most powerful coup of the FDCPA is it gives you the right as a consumer to request debt validation on any alleged account in collections. Because, you didn’t do business with any collection agency directly, requesting debt validation is simply performing your due diligence.
You see, many folks want to know will paying off collections improve credit? In short, no. All this does is change the status of the collection on your credit report, to a paid collection.
This is still a negative item that’s going to damage and drag your credit score down. Anthony Sprauve, a spokesman for FICO, says collections on your credit report can drag your credit score down by as much as 100 points.
The first step for every consumer dealing with debt collectors is to request debt validation in writing, and send using certified mail with return receipt requested. This way you have evidence they received your validation request.
The collection agency is required to respond within 30 days of receipt by showing you documents, evidence, and paperwork that proves this is, in fact, your account. This paperwork should show you who the original lender or creditor was, the dates of account activity, the balance, and all the pertinent details.
If they fail to validate your account, then in accordance with the FDCPA, the debt is legally forgiven. As in you’re no longer legally responsible for payment. Further, the collection agency is supposed to contact all three credit bureaus to have them start getting collections removed from credit report files, regarding this account.
If your account is valid, the next step is to investigate the statute of limitations. This is a state law, and it does vary, so for full details investigate your local legislation.
Generally, this is about seven years from the first date of delinquency. Once this time period expires then the debt is forgiven. This applies to most types of consumer debt including credit cards, medical bills, debt collections, retail accounts, auto deficiencies, and many more.
The few exceptions include federal defaulted student loans, and federal income taxes. Beware, one of the sneaky debt collection industry tactics is to re-age consumer accounts.
This is often done illegally. And the takeaway is it’s naive to believe debt collectors are sitting around waiting for your account to expire under the statute of limitations.
There are two parts here, the first is to always negotiate, so you’ll be paying off collections for just a fraction of the balance. Often you’ll be able to settle your debt for as little as 15% up to about 45%.
The exact amount will depend on the age of your debt. And the type of account it is, but you can anticipate paying somewhere in this ballpark.
But wait, before you just pay, you need to get the debt collectors to agree that in exchange for your payment, they’ll stop reporting your account information to all three credit bureaus. Otherwise, we’ll get smacked with that paid collection item on our credit reports.
Credit Clean Up
In this final section, we’re discussing the most effective weapon to repair bad credit, and this is cleaning up credit report negatives. This is going to improve your payment history credit score category, the most important area worth about 35% of your FICO score.
We’re going to be challenging and disputing credit report items by exercising your consumer rights, granted by the FCRA. This federal legislation passed way back in 1970, is what enables you to dispute any item on your credit reports, so long as you believe it’s made in error, misleading, or inaccurate.
There are three ways to dispute credit report items: online, over the phone, and by mail. Once the credit bureaus get your dispute, and deem it valid, they’re required to investigate the item. On a sidebar, they call it a re-investigation.
During which, they’ll contact the data furnisher (company reporting the negative information) and request verification of the account. If your account is not verified then in accordance with the FCRA it must be removed from your credit reports.
Using our earlier example, when you dispute the collection account on your credit report, once the credit bureaus investigate the item they’d contact the debt collectors for verification. As per your settlement agreement, your account wouldn’t be verified, and as such the credit bureaus would have to remove the item from your credit reports.
This is how to clean up credit report negatives. And it’s as powerful as removing a failing grade from your report card, when your GPA is calculated. By the way, due to amendments to the FCRA, today you can also dispute the data furnisher directly, bypassing the credit bureaus.
Like most things, the credit report dispute process sounds much simpler than it is. You see, the credit bureaus are for-profit businesses, and they don’t earn any money correcting your credit reports.
In fact, they spend money, that’s otherwise profit. The only reason the credit bureaus do this is because federal law requires them to. And they’ve been fined repeatedly for violating consumer rights under the FCRA.
In 2015, all three credit bureaus collectively agreed to settle with 31 state attorney generals and pay $6 million. All three credit bureaus have also been fined by the FTC, and the CFPB. Along with individual consumer lawsuits.
You see, the most likely response your credit report dispute will get is the credit bureaus will deem it frivolous and request additional information. Equifax did this to a woman, Julie Miller in 2013.
Julie woke up one day to discover 38 collection accounts, where erroneously showing up on her credit reports. So Julie invested two years in the credit dispute process, and responded to all of Equifax’s correspondence requesting additional information.
And when Equifax continued to give her the run-around, Julie got fed up and sued them. She was awarded $18.6 million by a federal jury. That was later reduced to $1.8 million by a federal judge.
Nevertheless, the compensatory damages were less than $200,000 this is the actual real-life damages. While the punitive damages were, even after the federal judge reduced the award, nine times the compensatory damages.
In sum, the credit bureaus have found it much more cost effective to stall, and essentially do everything they can to frustrate you, with the hope you’ll just give up and live with bad credit. Despite, federal law being on your side.
Look, credit restoration won’t happen overnight. But it need not take seven to ten long, expensive, embarrassing years either. So long as you’re willing to exercise your consumer rights granted by federal legislation.
Keep in mind, your credit score is just like your GPA in school days past. It matter’s not if you’re acing all your courses, if you’re failing underwater basket weaving, because this one negative mark is going to decimate your overall GPA.
This is why it’s so essential to clean credit history dings, blemishes, and remove any negative items. We encourage our members to consider professional, legal, and legitimate credit repair companies to help.
Because in 2016 alone, over 9 million negative items were removed from consumer’s credit reports. One of the best firms is The Credit Pros. They’ve helped client’s remove late payments, collections, charge offs, judgements, liens, and so many more negative credit report items.
Get a free credit consultation with a certified FICO professional by calling toll-free 1-877-418-7596. And for more tips, techniques, and strategies about how to fix credit score with Dan Willis, sign up for our free newsletter and join our congregation.
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