Credit is a lot like a game; positive scores are a bad thing, and negative scores are a good thing. Bankruptcy, foreclosures, and other kinds of financial ruin are a big threat to your spending, lifestyle, and financial security. Bad credit often limits the ability of a person to buy things and to spend his or her money. You can eliminate all these threats and problems by taking the time to clean up your credit reports.
Credit Reports at a Glance
There are a lot of “permanent records” you may already have: school records, an employee profile for a company you worked for, and medical records, just to name a few. If there's any one file that is more or less permanent, it's your credit report.
A credit report, also known as credit history, is the record of how much a person or a company borrowed from a bank, a credit card company, or a store, and how much of the loans were repaid over time. Credit reports are a big factor for financial companies and stores to determine your credit worthiness, or your ability to pay loans and debts on time. Banks reserve the right to refuse loans to people who have bad credit, and stores also reserve the right to not sell goods to people with negative credit scores. Stores and banks prefer to do business with people who pose low credit risks, because there is a reduced chance that a client will default on a loan.
Depending on where you live, credit reports are usually determined by some common factors, including:
•Debt control. Living beyond your means can have a dramatic negative impact on your credit score. If you can't afford weekly meals at an upscale restaurant and you whip out your credit card every time you order a fancy eight-course dinner, you're bound to have a negative credit score.
•Payment record. Your credit rating is significantly lowered if you have outstanding payments that have lasted 30 days or more. Credit companies are reluctant to lend money to people who are unable to pay their bills on time.
•Re-aging. Delinquent borrowers can use a credit policy called re-aging, which can give you a fresh start on your existing credit account. A financial company needs to evaluate your credit history and your capacity to pay debts before you can take advantage of of re-aging.
•Stability and longevity. Creditors are reluctant to provide loans for people who don't hold a steady job or have problems paying mortgages. A lending company typically prioritizes people who have been employed for at least two years, and do not have problems paying rent and other housing dues.
•Credit outstanding. Your credit limit exists for a reason; it's the maximum amount of money that a credit card company or bank is willing to extend to you depending on your ability to pay the loan plus interest.
What are Negative Items?
Think of negative items as factors that give your credit worthiness a bad name. Negative items weigh down your credit rating, and may prevent you from making further loans or credit purchases. Depending on the nature of the negative item, it can last either for seven years, 10 years, or 15 years:
•Credit card debts, foreclosures, repossessions, paid tax liens, and bankruptcies that fall under Chapter 13 (personal bankruptcy) remain on your credit report for seven years.
•Chapter 7 (liquidation both for businesses and individuals) remain listed on your credit report for 10 years.
•Unpaid tax liens remain on your credit report for 15 years.
Now that you know how credit reports work, here are some ways to clean up your credit report.
Want Something Done Right? Do It Yourself.
Unless you're in a serious rut with your credit records, it's best to stay away from consulting agencies and credit repair companies. A credit repair company is meant for companies who can afford their services; they tend to be quite expensive, and the least you want is to take out another loan just to pay off a credit repair agency. There's nothing about repairing credit risk and credit records that you can't do on your own.
Organize Your Credit
Once you get a copy of your credit report, it pays to organize your debts. A good idea is to arrange your debts by date, and then organize them depending on how much they cost. It's generally a better idea to pay off the newer debts first, and move on to the bigger debts. Almost all debts have interest, and it's easier to pay one big interest over one big debt than to pay smaller interest prices over a lot of small debts.
It's also important to prioritize critical items that may leave you with a negative credit rating on your report. There's nothing wrong with defaulting on an old debt, as long as you don't go to the creditor and make a promise you won't be able to keep. Keep old debts on the back burner for now, and deal with newer debts that will balance out your credit records to a positive credit rating.
Settle Disputes
Sometimes the credit company may make a few mistakes on your credit report. The first thing to do is stay calm. Mistakes do happen in the world of business and finance, and you can resolve these issues by yourself. To fix these disputes and increase your credit rating, follow these steps:
•Photocopy or print out a scanned copy of your credit report. Encircle or highlight items that you disagree with.
•Contact your creditors and point out the error in your credit report before you submit a formal written complaint to the credit company.
•Attach relevant documents like receipts, photocopies of contracts, agreements, and other paperwork with your complaint and credit report. Mark the paragraphs and the items for easy reference.
•Attach a letter that requests for an investigation to resolve the dispute. The credit company will then check to see if they made errors on your credit rating.
It's definitely a headache to resolve a dispute, especially if the credit company does not do enough to resolve the credit issues. When this happens, patience and persistence pays off. Don't settle for the usual computer-generated response from the credit company. If you feel that they're sidestepping the steps necessary to resolve your credit dispute, pay them a visit personally.
Keep Track of Your Finances
Like any financial problem, the best solution is often to not have bad credit at all. If you have a credit card, minimize your credit purchases; it is still best to make your purchases in cash. Pay all your bills and taxes on time to avoid surcharges, penalties, and liens. Keep all your receipts just in case you encounter a disputable item on your credit report. A frugal lifestyle may sound like a death sentence especially if you enjoy the good life, but it's better than the headaches caused by a negative credit rating.
Financial discipline is the first step to financial independence. To win in the financial game, you need to get positive results. By fixing your credit to a positive rating, you're sure to win in the money game. Whether it's a big business or personal finance, money matters are games you should always set your sights on winning.