It sure can be frustrating living with less-than-perfect credit? Not only is it embarrassing, but it’s also incredibly more expensive. You’ve probably heard this called the “poor tax.” And if you don’t know first hand, you can trust us, it’s real.
The worst part is the damage it does to our self-worth, pride, and ego. It makes us feel like we’re a second class citizen, not worthy of the same comforts as everyone else. And we both know, that ain’t true.
We also both know, bad things happen to good people from divorcee, illness, temporary job loss, and the list goes on. The university of hard knocks is a tough school to graduate from, but I assure you it’s worth it, and it sure doesn’t have to take the maximum seven long years.
Causes of a Bad Credit Score
Before we talk about how to improve credit and get your credit score up, we need to share what actually causes a bad credit score. And we’re not talking about the clothing of your personal circumstances that causes you to have less-than-perfect credit.
We’re talking about those credit report dings, blemishes, and the negative items. This includes late payments, collections, charge offs, judgements, liens, repossessions, foreclosures, bankruptcies, etc. The bad stuff.
You see, your credit score is a lot like your Grade Point Average (GPA) in glory school days past. It doesn’t matter if you’re acing all your courses, if you’re failing The Art of Walking, because this negative mark is going to ruin your overall GPA.
This is much like your credit score. Those dings, blemishes, and negative items are the cause and most common culprit for folks to have a bad credit score. It damages your credit score and drags it down, the same way a failing grade does to your GPA.
And just like removing an F from your transcript would vastly improve your GPA. It’s also true clearing bad credit and negative items is how to make your credit score go up, and the most effective and efficient way. How, you say?
How Long Does Bad Credit Stay On Your Credit Report?
You’ve likely heard you have to just live with bad credit for the seven maximum years. That it’s illegal to remove bad credit? Will go into detail about how to clean up credit report dings coming up, but first did you catch that nuance?
When people refer to this seven-year maximum time window, they’re talking about the Fair Credit Reporting Act (FCRA). It’s true the FCRA, does place a maximum amount of time of seven years that most negative items can remain on your credit report.
But, that’s the maximum amount of time. There is no minimum amount of time any negative item must remain on your credit report. Moreover, it ain’t like we robbed a bank or committed some criminal act.
Look, if O.J. can get early release from prison, we’re confident if you’re willing to assertively exercise your consumer rights, and the suggestions in this article, you too can get out of bad credit prison early. Millions of Americans do every year, evidence in 2016 alone is over 9 million negative items were removed from consumer’s credit reports, but we’re getting ahead of ourselves.
5 Credit Score Components
We need to share the five components that go into calculating your credit scores. For our purposes here, we’re talking about your FICO credit score, this is the most popular and widely used score by lenders and creditors.
On a sidebar, you have more than one FICO score. You’ll have a FICO score for your Experian credit report, and an another score for your TransUnion credit report, and then you also have industry-specific FICO scores for automobile financing, for example.
Additionally, there is the VantageScore, which is a scoring model created in 2006 as a joint venture by all three major credit bureaus (Equifax, Experian, and TransUnion). However, this isn’t widely used yet. We’ve listed the five components below and their approximate value in your FICO scores.
1. Payment History
The first component is your payment history. This is looking at all the information contained on your credit reports, both the positive accounts, and the negative items. This is worth the most and about 35% of your overall FICO score.
2. Amounts Owed
This is worth 30% of your FICO score, and it is looking at your total debt and comparing that to your available and unused credit. Don’t panic, if you have large amounts of debt in the form of student loans, mortgage, even car loans.
This component is focused on your revolving credit lines, for instance, a credit card. The idea is if you go in and apply for financing, and you have a credit card with a $2,000 limit, and a monthly balance of $400, you’ll appear in a more creditworthy position in life.
Especially if you’re sitting next to a guy with the same credit card account, and a monthly balance of $1,979. He has $21 of available and unused credit, whereas you have $1,600 of available credit. It makes sense.
3. Length of Credit History
This is worth 15% of your FICO score, and it’s, of course, looking at how long you’ve been using credit, big picture. And also the age of each specific account on your credit reports. Generally speaking, the older the better.
4. Credit Mix
This is only 10% of your FICO score, and it’s looking at what types of credit you have. Do you have a credit card? Car loan? Student loans? The idea is the more diverse your types of credit accounts, the better.
5. New Credit
This again is only 10% of your FICO score. And it’s looking at how often you’re applying for financing or new credit. It’s okay to do some rate-shopping, but we want to avoid appearing like we’re trying to get a mortgage every month.
The first two components are where you need to focus your efforts to fix credit score information, your payment history and your amounts owed. Cumulatively, these two components equal 65% of your FICO score, and they’re the most directly under your control. With normal use, your length of credit history, credit mix, and new credit will be just fine.
3 Credit Building Tools
We’re going to share three of the more popular credit building tools, because we’re going to have to build good credit, and remove the negative items to most effectively and efficiently improve credit. These three tools are merely the tip of the iceberg, there’s many more, and they don’t have universal application.
1. Authorized User
This is by far our favorite method because it works. If you’re fortunate enough to have a trusted loved one, with good credit, and a credit card, it can help your credit score to be added to their credit card account as an authorized user. Because this account, moving forward, will be reported on your credit report and their credit report too.
So with continued responsible use, this will help immensely to fix your credit. Your amounts owed credit score component should benefit, especially if they have a high credit card limit, and keep a low monthly balance. It’s recommended, 30% or less of the limit is the target range for your monthly balance.
Also, your payment history will improve because with every on-time monthly payment, you’ll be building a trail of positive payment history. However, you need to be warned if something like, life happens, and things go awry this tool can also damage your credit score. For instance, if monthly payments are missed, etc.
2. Responsible Credit Card Usage
As we’ve shared, your amounts owed category focuses on revolving credit lines, like credit cards. With good reason, this is usually a good indicator of what’s going on in someone’s life, if they’re missing monthly payments, it’s a good chance they’re under financial distress.
However, with responsible use, this can be a very effective tool to repair credit score. Because the on-time monthly payments will create that trail of positive payment history. And if you keep a low monthly balance you’ll also see your amount’s owed credit score component benefit with the available and unused credit.
Can’t get approved for a traditional, unsecured credit card? It’s okay, and you’re not alone. It won’t be quite as effective, but another effective option is a secured Visa and MasterCard, despite it being reported as a secured account on your credit reports.
The difference with secured credit cards and traditional ones, is you’ll first be required to make a security deposit with the credit card issuing bank. This money is what secures your account. Same idea, behind getting a loan from a pawn shop, just we’re using cash rather than property as collateral.
This deposit is fully refundable, so long as you keep your account in good standing. Frequently, you’ll be able to choose the amount of your deposit, for example, you could choose $500, and then most often you’ll be given a Visa or MasterCard with a corresponding limit, in this case, a $500 credit limit.
There is a slightly higher interest rate, and typically a nominal annual fee. Reasonable, nothing sky-high, and for some individuals, this is an effective tool. Capital One has one of the more popular offers, just make sure if you go down this road that your account will be reported monthly to all three credit bureaus.
Again, for those fortunate enough to have a trusted, loved one with good credit, asking them to co-sign, can, of course, be an effective way to get approval for many types of credit lines. Just please, use discretion with this and any method you pursue. It’s not worth investing huge sums of money, or burning bridges with friends and family.
How To Clean Up Credit Report Dings
Did you know it’s a very high probability your credit reports aren’t 100% accurate? It’s true. The Federal Trade Commission (FTC) studied this, the accuracy of American’s credit reports in 2012. Direct from their press release: “One in five consumers had an error on at least one of their three credit reports.”
That’s unbelievable! It’s millions of American’s with total, blatant, egregious errors on their credit reports, that need to be removed. And these aren’t the items in dispute, such as when a contract or agreement got messy, these are total mistakes. Costing real, and big money.
This is what the intention was behind the original passage of the FCRA, way back in 1970. The idea was to give the everyday, average American a way to tell the credit bureaus there’s an error on their credit reports, and it needs to be removed.
This federal legislation is how to dispute items on credit report files, or challenge them, and it also requires the credit bureaus to investigate the item. There’s 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, which is another conversation for another time and place. So make sure to sign up for our free newsletter for more credit score help with Dan Willis, and join our congregation.
Once the credit bureaus get your dispute and deem it valid, they’re required to investigate the item. They call it a re-investigation, nevertheless, they’ll contact the creditor, lender, data furnisher that’s reporting the negative information and ask them to verify your account. If it’s verified, it’ll remain on your credit report, and possibly updated with accurate information.
However, the more common result of these re-investigations is the item is not verified. In compliance with the FCRA, this means the credit bureaus must remove the item from your credit reports. This is how to clean credit report dings, blemishes, and remove negative items, and do so legally by exercising your consumer rights.
We’d be remiss if we didn’t share, there have been amendment’s to the FCRA, today, 2017 you can also dispute a data furnisher directly and bypass the credit bureaus. This is used for extreme cases such as identity theft. For our purposes and traditionally we’re looking at the credit bureau dispute process.
The big challenge and where most people give up is in getting the credit bureaus to actually deem your dispute valid, and re-investigate the item. This is because it costs the credit bureaus money to investigate consumer disputes.
Even to fix mistakes, this is only an expense for the credit bureaus. Further, this money is otherwise profit, and returns paid out to stockholders. The credit bureaus are not part of our government, nor do they have some quasi-official standing.
They’re private for-profit businesses, just like every business. The only reason they do investigate consumer disputes is because federal law requires it, and that’s a very debatable statement.
Did you know in 2015, all three credit bureaus collectively agreed to settle and pay $6 million to 31 state attorney generals for allegedly violating consumer rights under the FCRA. It was alleged, the credit bureaus were just ignoring consumer disputes.
You may have seen a 60 Minutes episode in recent years, featuring this story. This is in addition to paying repeated fines to the FTC and the Consumer Financial Protection Bureau (CFPB). Along, with individual consumer lawsuits.
You see, the most common result and response to your credit report dispute will be for the credit bureaus to find your dispute frivolous, and they’ll request more information. They do this as nothing more than a stall-tactic, with the goal of you just going away and living with less-than-perfect credit.
Because that’s what most people do. This is exactly what happened to Julie Miller in 2013, this lady woke up one day to discover her stellar credit was decimated because of a mistake, and a big one. Some random stranger’s 38 collection accounts were showing up on Julie’s Equifax credit report.
Obviously, destroying her credit score. So she did what she was supposed to and filed a credit report dispute directly with Equifax. The long and short of it, is over the course of the next two years, Julie continued to have her dispute deemed frivolous and Equifax would ask for more information.
She cooperated and sent them W-2’s, pay-stubs, hair samples, and DNA, all to no avail. And yes, that’s a small exaggeration. Nonetheless, after two years, and Julie’s still getting the run-around, she had enough and filed a civil lawsuit.
And won. A federal jury awarded Julie $18.6 million. This was later reduced by a federal judge to a total of $1.8 million. However, this federal judge found Equifax’s behavior so reprehensible that Julie was given a full nine-times her compensatory damages in punitive damages.
For the uninitiated the compensatory damages are the actual life damages, this money is supposed to make you whole again. Whereas the punitive damages are for the aggravation, annoyance, and to serve as a punishment. That’s a statement, a federal judge awarding her nine-times as much in punitive damages, and says truly says all we need to know.
We don’t share this to discourage you. We share it in the spirit of the timeless book The Art of War. You must know your adversary before going into battle. And when you’re working to fix bad credit, you’re going into battle not just with the credit bureaus, but when dealing with debt collectors.
And that’s another conversation for another time and place too. In short, the Fair Debt Collection Practices Act (FDCPA) is federal legislation intended to regulate the debt collection industry. And yes, it’s violated about as often as our drug laws.
The takeaway is some folks may need to pay off debt in collections, of course after first performing the necessary due diligence. When done the right way this can be an effective method to clear credit report negatives.
Which is how to get your credit score up, removing the negative items that are dragging it down. And of course building good credit with your current responsible credit behavior.
At the end of the day, you’re swimming with the sharks when trying to fix credit, and there’s blood in the water. Seriously. Neither the credit bureaus or the debt collectors give a flip about you or your family, and least of all your creditworthiness. They just don’t.
However, you no more need to spend the full seven-year maximum bad credit prison sentence, than O.J. had to serve his full sentence. Can you really afford to do nothing for seven years? Can your family or your dreams afford to just sit on pause? I hope not.
Keep in mind, your credit score is a lot like your GPA in school days bygone. It doesn’t matter if you’re acing all your classes, if you’re failing underwater basket weaving, because this negative mark is going to obliterate your GPA.
This is also true of your credit score. And why it’s of such paramount importance to clear credit report dings, blemishes, and remove the negative items. We encourage our members to consider professional, legal, and legitimate credit repair companies to help with this.
Because in 2016 alone, over 9 million negative items were removed from consumer’s credit reports. One of the best credit repair companies is The Credit Pros. They’ve helped client’s successfully 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 improve your credit score with Dan Willis, sign up for our free newsletter and join our congregation.
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