Effective credit repair requires a combination of technical and legal skill along with a healthy dose of common sense. The technical approach requires an understanding of the inner workings of the FICO credit scoring model. The legal approach uses aspects of the Fair Credit Reporting Act (FCRA) and the Fair Debt Collection Practices Act (FDCPA) to gain maximum leverage when dealing with the credit bureaus and collectors. And finally, common sense brings good old fashioned debt and credit management into the picture. The technical and legal approaches are essential to any effective credit repair effort, and can produce exciting results, but without simultaneously infusing a little common sense into your program you will disappointed with your outcome. Here are our favorite credit repair techniques of the pros.
Balance Reduction
The FICO scoring model recognizes five very specific levels of credit card usage. Understanding this technical aspect of credit scoring is essential to your credit repair success. Depending on the overall content of your report, your card balances can swing your scores by as much as 150 points, enough to mean the difference between loan approval and denial, or between the lowest interest rate available and the highest. The levels of card usage recognized are 20, 40, 60, 80, and 100 percent. To optimize your scores reduce your balances below 20 percent usage.
Authorized User Accounts
Authorized user accounts provide an interesting technical credit repair tool. The FICO ’08 release of the Fair Isaac scoring model blocked the score benefits from purchased or brokered accounts, but specifically left the benefits from legitimate family member accounts. Here is how it works. If a willing family member or friend adds you to one of their excellent credit cards as an authorized user you will inherit the score benefit of that account. Just make sure that the donors account has a perfect payment history, a reasonably low balance relative to the limit, and has been open for at least three years.
Challenge Collections
One of the most useful legal credit repair angles involves the presence of collections on credit reports. By law, when a collector sells a debt to another collector, or sends it back to the original creditor, they are required to remove the account from your credit report entirely. This rule is most often ignored for the sad reason that there is no incentive for them to bother complying. Take the matter into your own hands and dispute all questionable collections on your credit report. You might want to consult a credit repair expert in advance to explore related issues like calculation of original default date, statute of limitation, and reporting period limits.
Validate Debt
Another handy legal credit repair tool is debt validation. Under the FDCPA, the legislation that governs the collection industry, you may request valuable documentation from a collector within 30 days of receiving a collection letter. Upon receiving a collection letter you may write to the collector and ask them for legal proof that they currently own the debt, and an objective accounting of the amount they say is due. If they cannot furnish the requested documentation they must cease reporting and all collection efforts.
Avoid Consumer Debt
Consumer debt includes store credit cards and financing typically offered by furniture and electronic stores. Avoiding this debt combines common sense with a little technical credit repair knowledge. The FICO scoring model carries a bias against this type of debt so you are at a score disadvantage right away. And although opening an account at the point of purchase may offer some convenience, this type of debt is most often carries a high interest rate and unfavorable terms. In many cases you may be offered fixed term no-payment options that can mature into stressful repayment requirements. You may be better off waiting until you can afford to pay cash.
Budget and Save
If you really want to support your credit repair effort and insure against unforeseen events that may cause you to fall behind on your payments you should build a budget. An intimate understanding of your entire financial picture is essential to long term stability. And more to the point, when you have taken the time to examine your own finances you will be able to make clear and responsible purchase decisions. Once you have built a budget you should start a saving plan. Contribute each month with the same sense of commitment and obligation that you feel towards paying your electric bill or rent. Good financial management leads to long term wealth and the credit repair insurance that will serve you for years to come.
