Understanding how credit scores work is crucial when it comes to credit repair. A credit score is a numerical representation that reflects your creditworthiness, which is determined by your financial behavior and credit history. Lenders often use credit scores to assess the level of risk in lending money or extending credit to an individual. Here are some important factors you should know about credit scores for the purpose of credit repair:
1. Range of Credit Scores:
FICO scores, which are widely used in the industry, range from 300 to 850. Higher scores indicate better creditworthiness, while lower scores suggest a higher level of risk.
2. Components of Credit Scores:
– Payment History (35%): This refers to the record of your payments on various types of accounts such as credit cards, mortgages and loans. Late payments, defaults or bankruptcies can have a negative impact on your score.
– Credit Utilization (30%): This measures the ratio between your outstanding balances and available credit limits on your credit cards. It’s important to keep this ratio low (typically below 30%) for a higher score.
– Length of Credit History (15%): The length of time that you have actively held various types of accounts is taken into consideration.
– Variety of Credit Accounts (10%): This refers to the different kinds of credit accounts you have, such as credit cards, mortgages and installment loans.
– New Credit (10%): Opening multiple new credit accounts within a short period can be seen as risky behavior and might have a negative effect on your score.
3. Reviewing Your Credit Report:
Obtain copies of your credit reports from the major credit bureaus (Equifax, Experian and TransUnion) and carefully examine them for accuracy. Look out for any errors, inaccuracies or signs of fraudulent activity. If you spot any discrepancies, make sure to dispute them with the respective credit bureau.
4. Strategies for Credit Repair:
– Payment History: Make sure to make timely payments on all your credit accounts. If you’ve missed any payments, try to catch up and consider negotiating with your creditors if needed.
– Credit Utilization: Lower your credit card balances to reduce your overall credit utilization ratio.
– Length of Credit History: Keep older accounts open since they contribute positively towards the length of your credit history.
– Variety of Credit Accounts: Strive for a healthy mix of different types of credits. However, it’s not advisable to open new accounts with the sole intention of diversifying your credit.
5. Be Patient and Persistent:
It takes time to improve credit scores. Stay patient and committed while consistently practicing responsible credit behavior. Make it a habit to regularly check your credit reports to keep track of your progress.
6. Consider Professional Assistance:
If you require guidance and support in the credit repair process, think about seeking help from reputable credit counseling agencies or credit repair services.
Remember that credit repair is a gradual journey and positive changes in your credit score will occur gradually as you consistently demonstrate responsible financial behavior.