Now that you understand how credit works, it's time to apply this information to your own credit report so you can improve credit. Here are the steps you'll take as you look over your report. (Each item will be discussed in more detail in the sections that follow.)
1. Examine personal data for accuracy. Up to 90% of all reports do contain mistakes! File a dispute using the links shown here if you discover errors in your personal data, or in the accounts shown on your report. Look for whether they're open or not, whether late payments are showing, and the amounts owed.
2. Count the number of open accounts, how long they've been open, and consider what kind of credit they're considered. Though nobody knows the "ideal" amount of accounts to have, up to 11 is a pretty safe number. If you have too few or too many, consider closing newer and/or revolving credit accounts.
3. Evaluate your amounts owed and payoff dates. If you can pay off a small balance so that it shows zero due, it can help your credit. You might want to keep the account open, however, especially if it was established several years ago.
4. Address other problems as able (bankruptcies, judgments, and late payments.) For large loans like mortgages, it's important to have no late payments in the year before your loan application date. If your credit report shows bankruptcies or judgments, you'll want to get them discharged as quickly as possible, which means paying them off and getting a letter showing that the debt has been satisfied.
Obviously, that can be easier to say than to complete, especially if it's a debt for thousands of dollars. If this is your situation, I recommend calling the company and trying to negotiate a lower amount in exchange for sending in payments sooner than they expect. Some companies will agree to take pennies on the dollar for what you owe, because it's better than making nothing at all.
If they agree, get the agreement in writing, signed by a company representative who is authorized to make these decisions on the company's behalf. During these negotiations, ask them to remove the derogatory information from your report. If they refuse, ask them to agree not to respond to the credit bureau's inquiry. Make the promised payments, and request a letter showing you satisfied their terms. It will probably still show a "charge off" on your credit, which can appear for up to seven years after it happened. However, lenders will often ignore it if it has been satisfied for a couple of years.
Before you make any payments on old debts, be aware that it can actually cause you more harm! In some locations, creditors can pursue you from the date of last activity on an account. Making a payment can extend the amount of time that they can chase you for money, which can prevent your credit from recovering several years from now.
That's why it's vital to get an authorized agreement for a settlement. Once you've satisfied those terms, you can dispute the account on your credit report. The credit bureaus must investigate a dispute you request, but if the company doesn't respond within 30 days, it will be removed from your report, even if it's a foreclosure!
Any accounts that went to collection agencies may appear several times with different account numbers. For instance, if "ABC" couldn't collect an account, they may have sold it to "XYZ Collections", who assigned their own account number. If they couldn't make progress, they may have resold it again to "Last Chance Debt Recovery," and so on. To figure out if one debt is appearing several times, look at the balances and dates. Pay off only one company and submit the letter of satisfaction to the others so they can update your report.
5. If you're in the process of seeking a loan, ask your lender to provide a model of how the steps you're able to take will adjust your score. If the model meets the lender's criteria to give you the loan, it may be worthwhile to pay a fee for them to to a "fast check" so your report will get updated more quickly. A fast check asks your creditors to provide an update about your account without waiting for their next reporting date. This means your FICO score can be raised within 30-45 days instead of waiting months for those updates to appear.
Be careful about paid credit repair agencies! Many of these companies can make matters worse. There are legitimate ways to address credit problems, and most of them can be handled without a third party. If you truly want to hire someone to fix the issues you're having, you'll need to consider how they go about fixing your problems before spending your money. Their so-called solution may be to "arrange" a payment plan with your creditors that is less than you originally agreed to pay, which means the creditor says, "Sure, we'll take what you can send" but their methods fail to bring your accounts current, so the companies you owe will all report the payments as up to 120 days late, month after month!