Did you know that credit repair is one of the most popular topics within the realm of consumer finance? It's true. Each day, thousands of people go online searching for information related to the repair of credit.
What is Credit Repair Anyway?
Before we go any further, we need to clear up some terminology on the subject of credit repair and credit scores. Unfortunately, there is a lot of confusion surrounding this subject, and much of that confusion comes from improper use of terminology.
Basically, the phrase credit repair could refer to one of two things:
So let's talk about each one of these topics in more detail, staring with corrections made to a credit report.
Correcting Your Credit Report
Did you know you actually have three different credit reports? It's true. You have one for each of the credit-reporting companies -- Experian, Equifax and TransUnion. The reports are not shared between these companies, but unique to each company. This means that you could have a mistake on credit report but not on the other two. Or you could have the same mistake on all three reports from all three companies.
In turn, your credit score is derived from the information found within your three credit reports. So as you might have guessed, you have three scores as well. It's a bit redundant, I know.
When you buy a home and apply for a mortgage loan, the mortgage lender will check your credit by requesting information from all three of the credit-reporting companies. So it's important for your credit reports to be accurate and free of errors. An error on one or more of your reports (such as a loan that's not yours) could potentially lower your credit score, thus lowering your chances of being qualified for a loan.
So this type of credit repair involves corrections made to your reports. Of course, the first thing you need to do is request copies of your credit report (see the home-buying tools to the right). Only then can you review the information for accuracy. If you find a mistake on one or more of your credit reports, you should submit a dispute on the company's website that produced the erroneous report.
So the first aspect of repairing credit refers to your reports. The second form of credit repair has to do with improving your credit score by changing your financial habits for the better. So let's talk about that next.
Improving Your Credit Score
In the first form of credit repair explained above, you are basically fixing administrative mistakes (or possible identity theft issues) that have led to errors on your credit report. It's important to get these things straightened out because the can negatively affect your credit score and possibly harm your chances of being qualified for a mortgage loan.
But what if your credit reports are accurate but your score is still low? In this scenario, you probably have something in your past that is dragging your credit score down. Maybe you have declared bankruptcy in the past, or had a home foreclosed upon, or you simply have a history of missing bill payments. To repair these types of credit problems, you must correct the financial behavior that led to the problem in the first place.
So in this form of credit repair we are talking about improving your scores by being financially responsible (more so than you were in the past). Paying your bills on time, reducing your debt and avoiding new lines of credit can all help you improve your score.
Let's summarize before moving on. Credit repair is a confusing subject for many home buyers because it can refer to two different things. When you make corrections to one or more of your credit reports, you are in a sense repairing your credit overall. Likewise, when you adopt better financial habits you are also engaging in a form of credit repair that will improve your score.
Establishing good credit makes life all-around easy. Want to buy a new car and need a loan? No problem. Want to buy a house? Mortgage lenders have no problem working with you.
In fact, by establishing and maintaining good credit, you’ll be able to get loans with lower interest rates, which saves you a lot of money in the long run.
Since credit is used for so many things in life, it’s important to have good credit. Establishing good credit now pays off in the long run when it comes time for the big financial decisions in life.
Here are a few things to keep in mind when it comes time to establishing credit (and why you really do not want bad credit).
Buying/Renting a Home
Mortgage lenders don’t want to award loans to anyone who might default on them. If you have bad credit, the mortgage lender will consider it risky to give you a mortgage.
What does this mean?
If you are approved for a loan, you’ll have a higher interest rate than those with good credit.
A higher interest rate on the loan means your monthly mortgage payment will be higher, and you’ll dole out more money than someone with good credit in the long-run. Plus, you run the risk of having your mortgage application turned down completely if you have bad credit.
Even if you’re not buying a house, good credit is still important when renting an apartment. Landlords will run a credit check, which affects whether or not they want to rent to you.
Landlords want to collect money on their properties, and want to know this money will be coming in consistently and on-time each month. If you don’t have good credit, you could be denied an apartment because your credit score is a glimpse into your level of financial responsibility.
Buying a Car
Unless you pay for your car entirely in cash, you need an auto loan. Your credit first affects whether or not you qualify for an auto loan.
Generally, applicants with good credit qualify for larger loan amounts with lower interest rates than those with bad credit.
Bad credit limits your options!
If you have bad credit, fewer lenders will work with you. If they do decide to, they will charge you a higher interest rate on your loan, which means a higher monthly payment and more money shelled out in the long run for your car.
Searching for a Job
Many employers conduct credit checks as part of the hiring process. If you haven’t demonstrated financial responsibility, many employers may be hesitant to hire you.
Maybe your level of debt is too high for the offered salary. This may come into play when you’re up for a promotion or raise, especially for financial-related or executive positions.
Starting a Business
Dreaming of starting your own business? If you have bad credit, you may need to rethink that dream for the time being. Most business startups require a sizable amount of cash that you might not have available.
In that case, you’ll need a small business loan. You need good credit to qualify for the business loan, and you’ll run into similar problems as you would with an auto loan or mortgage.
Paying the Bills
Credit is needed to establish utility service. Bet you didn’t know that. Your electric company says that you’re borrowing one month of electric service, which you’ll need to pay back each month.
Before turning on your electricity, the company checks your credit. This applies to most service utilities, such as cable, telephone, water and even cell phone service.
Since your credit is defined by how you’ve paid your bills in the past, many businesses use your credit to predict your future financial responsibility. Whenever you need to borrow money, or certain services, your credit is always called into question.
This means that establishing and maintaining good credit is crucial and affects virtually every aspect of your life as an adult. Do yourself a favor: establish good credit and maintain it for an easy, breezy financial future.
Are you struggling to repair your credit? That can feel like you’ve dug a hole so deep, it’s impossible to get yourself out. Don’t panic, just call in the experts.
Reach out to me today for more information on how I can help you start on the path to repairing your credit and taking your finances back.
Click Here to See How You Can begin Repairing Your Credit Today