How to Clean Up Your Credit Report

by Kevin on December 3, 2012

With the explosion of job losses, foreclosures and bankruptcies in the past few years a lot of people now have to deal with damaged credit profiles. Once sparkling credit reports are now littered with derogatory information that not only makes it difficult to get new credit, but it can also have a negative impact on getting a job, an apartment or even an insurance policy.

If you’re in this situation you’re going to have to take some steps to clean up your credit report.

Start by getting a copy of your credit report

Understand that there are three credit repositories feeding into your credit report: Experian, Trans Union and Equifax. Most creditors report their credit experience to one or more of the repositories, but it’s important that any credit report reflects results from all three. This type of report is often referred to as a triple merged credit report and this is the report you want.

It’s generally cheaper to get a credit report from a single repository, but it will not be reflective of your complete credit profile and that’s what you need to see. Since not all creditors report to each of the three repositories, it is very possible that derogatory information from such a creditor will not appear on the single report. You might think that since the information doesn’t show up on the single report that it doesn’t exist, but that won’t be the case. Get the triple merged and get the complete picture.  There are many ways to get free credit scores so explore your options before you pay for one!

From now all, pay all bills on time

This should go without saying, but no matter what appears on your credit report, resolve to pay any and all bills on time from now on. If you’ve had credit problems in the past, this one step will prevent the situation from getting worse in the future.

Dispute erroneous information

If you discover late payments or charge-offs reported in error, you must formally dispute them. This will involve contacting the creditor who is giving the negative information and opening up a dispute. Occasionally—if the creditor has no record of the incident—you can successfully remove the error over the phone. More likely, you’ll have to provide written evidence that a payment or series of payments were made on time, or that an account is paid in full. The best evidence is a canceled check.

Once a creditor agrees to correct the error there are two things you MUST get:

  1. The creditor must agree to removing the derogatory information from all three credit repositories, and
  2. the creditor must furnish you with a letter confirming that the derogatory information was reported in error.

The letter gives you the ability to go back to the three credit repositories yourself in the event that the creditor doesn’t do it.

Make settlements on past due balances

If there are past due balances—charge-offs or collections—that are either valid or where you have no written evidence to prove an error, the best course of action is to pay it off. If you don’t have the money to do this, you can either set up a payment schedule, or offer a reduced amount in full settlement of the balance due.

However you handle it, be sure to get a letter from the creditor confirming your understanding of the payoff agreement and, once the debt is paid, another letter confirming that it’s paid in full. And of course, you also want to ask them to report the payoff to all three credit repositories, but if they don’t, you’ll be able to do it with your payoff letter.

Payoff small loans

So far we’ve covered how to deal with past credit problems, but there are some factors that affect your credit scores that have nothing to do with late payments or past due balances. One factor that has an affect on your credit scores is the number of loans you have outstanding. If you have five loans, whether they’re credit cards, installment loans or a car loan, you can often improve your credit scores just by paying one or two of them off.

Pick the smallest loan and get it paid, then move up to the next smallest one. This can help your scores even you have derogatory information elsewhere.

Pay down large loan balances

Credit utilization is a major influencer of credit scores. What this is, simply, is the amount of outstanding debt you have as compared to the amount of credit you have available. Let’s say you have a total credit limit of $20,000 on four credit cards that you have; if you owe $18,000 on them, your credit utilization is 90% ($18,000 divided by $20,000). Generally speaking, utilization above 80% has a negative affect on your credit scores and it can be severe.

In order to improve your credit scores, pay down any large balances until you’re below 80% of your credit limits. This is also true of installment loans, so you’ll want to pay these down as well. (Fortunately, this does not apply to mortgages!)

Time heals all

Credit reports have one common benefit, and that’s that your credit profile will improve as time passes. The key is to fix anything that’s wrong with your credit, pay all future bills on time, then wait for your credit and your credit scores to improve. They will, but it usually takes some cleaning up to get it started.

How long will it take? That will depend on your credit problems. Delinquencies reported in error and withdrawn will provide immediate improvement. Late payments on revolving accounts become less important after about a year; installment or mortgage late pays will take longer. Paid charge-offs and collections, 2-3 years. Bankruptcies and foreclosures will be on your credit report for 7-10 years. But the good news is that all will get better as the time between the now and the incident grows.

The sooner you get your credit report cleaned up, the sooner the clock will start moving and you’ll be on your way to a better credit profile.

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