How To Restore Your Credit Rating

How To Restore Your Credit Rating

If you are among the tens of thousands of Americans that have damaged their credit rating by misusing or abusing credit cards you may want to know how you can restore your credit. Some people may have suffered financial distress due to long periods of unemployment or illness, and now need a way to repair their credit. It is hard work to repair credit, but it can be done!

According to Gerri Detweiler, a credit expert and author of "The Ultimate Credit Handbook.": "First you need to understand how credit works and then you need a plan."

Credit Reporting Agencies

You need to find out what credit reports say about you. There are three credit reporting agencies, Trans Union, Experian and Equifax. For a nominal fee they will send you a copy of your credit history as they show it. You should evaluate each one of them once a year to ensure that they report accurate information on your credit history.

Stay away from "credit repair agencies" or "clinics" that promise to clean up your credit using loopholes in the law that only they know about. Some may also promise to remove negative information on your report or that they will help you obtain a major credit card. According to John Ventura, author of "The Credit Repair Kit", these are false promises. Some of these agencies could even get you into legal trouble encouraging you to misrepresent information on your credit record or assist you with creating a new record/file using a different address and federal identification number. "There are no special tricks that these credit repair clinics know," says Ruth Susswein, executive director of Bankcard Holders of America. "You can clean up your credit report yourself."

5 Steps to Repair Your Credit

1. Lock Up Your Credit Cards
Do not close any accounts at this time, because with damaged credit, it may be hard to obtain new cards. You MUST stop using the cards right away. Your goal is not only to repair your credit rating, but also get out of debt.

2. Determine Where You Stand - Income vs Expenses
It is not pleasant looking at net worth statements and budgets when you may realize that your income is less than your debt and your net worth is negative. Unfortunately, the first necessary step is realizing the truth, because that will help measure your success as you go through the process.

You do have control over your budget and net worth. A large part of your credit record, however, is controlled by others - your creditors and the reporting bureaus. Between 30% and 40% or credit reports contain errors according to Ventura. You need to clear those up first.

You can write to the credit bureaus and send letters via certified mail detailing any errors that you have found on your credit report. Make sure to request a return receipt for your letter as you work on restoring your credit. Another option is to complete forms online with the credit bureaus for this process.

Provide backup materials whenever possible proving that there are errors on your report. For example, if you paid off an account and have a zero-balance statement or letter from the creditor that the account was paid off, but it is still showing up on your report, provide that letter/statement as evidence. Do not write your letter in an angry tone or be accusatory.

In your letter, identify problems such as the following:

"In my credit report with your company, it shows my Best Buy account as past due. I have in fact paid off the balance and closed the account. Please see the attached statement/letter supporting that fact."

Request for the report to be investigated and corrected as soon as possible and ask that the updated report be sent to anyone who requested a report within the past six months for credit purposes and the past two years for employment purposes.

3. Formulate a Plan of Action
The first step in restoring your credit rating is starting to pay your bills on time. You must pay at least the minimum payment due by the creditors due date every month. Determine whether this would be possible for you. If you can't come close, you may want to consider credit counseling. If it is completely hopeless, you may want to consider bankruptcy and a fresh start. Determine which course of action will be best for you and stick to it.

4. Creditors will Negotiate
If you are having trouble paying your bills, chances are 9 out of 10 times that a creditor would be willing to negotiate their terms with you. Some companies that may be good candidates to negotiate with are gas-line companies, utility companies, hospitals and doctors. Gasoline cards usually don't report on your credit report until you are 90 days past due, and others don't usually show up on credit reports unless the creditors sent the bills over to a collection company. Contact your creditors and explain your circumstances and request a reduced payment plan. Stick to this plan!

5. Add Good Information to Your Credit File
Information that may help your credit rating should be added to your report whenever possible. While creditors aren't required to report to the credit bureaus, you should consider adding information that may help your rating.

Negotiating, Planning, Adding Information and More

According to the law, you are entitled to writing a letter with up to 100 words regarding any credit dispute and the reporting agency must provide this information to any creditors that ask for information. This letter might include details about loans that you paid on schedule, active accounts with a good payment record, salary increases at your job and information about your car loan, mortgage, or the settlements reached over disputed bills.

When you write to the credit bureau, include a copy of your credit report as well as any information you would like added to the report. Creditor information and account numbers would help the credit bureau to verify the information.

Many creditors weigh the newest credit information on one's report more heavily than older information. However, negative information can be included in your credit report for 7 years and 10 years for bankruptcies.

"How much you pay is not as important as how often you pay," Detweiler says. "It's important to establish a record of paying bills on time and to stick with it."

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