Credit repair: Its Importance in Your Financial Planning

Credit score (also known as FICO score) is one of the most essential aspects of personal finance. When you apply for education loan, mortgage refinance or a new credit card, lenders will review your credit score before approving your loan application. If you've a bad credit score due to past financial mismanagement and have bankruptcy or debt settlement recorded on your credit report, then you focus on credit repair to build the score up gradually.

Credit score calculation

Credit Bureaus – Exprerian, TransUnion and Equifax use software developed by the Fair Isaac Corporation to calculate your credit score. Thecredit score or FICO formula is a mystery. It is mainly calculated on the basis of following data.
  1. Outstanding balances – Credit bureaus calculate your credit score on the basis of your total debt amount. It comprises of number of outstanding bills, the type of loans and the entire debt that you've.
  1. Monthly payments – Your monthly debt repayment history is also used to get your credit score . The payment records, the debt amount and number of days you’ve been behind in payments, any record of bankruptcy, debt settlement and lawsuits are included in this history.
  1. Miscellaneous factors - The age of your active credit accounts, credit type and the number of credit applications are the remaining factors that will help to calculate your score.

Reasons for poor credit score

These are some of the reasons that will affect your credit score adversely:
  • Collection accounts – Once you are delinquent on payments, your creditor will sell your account to the collection agencies and report it to the credit bureaus. Open collection accounts will reduce your credit score considerably.
  • Business cards – Frequent use of business cards increases your outstanding balances that will jeopardize your credit. Moreover, the Credit Card Act does not fully protect a business card holder.
  • Credit cards – Closing a credit account will result in wiping-out the credit utilization ratio. This is one of the reasons why you’ll get a low credit score. It is a major determinant of calculating the FICO score. After all, frequent fluctuations in credit profile are harmful for credit score.

Steps to get a pristine credit score
These are the evergreen steps to repair your credit score. You may also call it as do-it-yourself credit repair steps:
  1. Credit history – It takes a considerable amount of time to regain the past glorious score that will re-instill faith amongst the creditors. The key is smart and disciplined financial management. Keep all the credit accounts active to lengthen your credit history.
  1. Payments – Be consistent in paying the outstanding bills on time. Almost 35% of the credit score depends upon your payment history.
  1. Credit utilization ratio – Credit score also depends on your credit-utilization ratio. Keep your credit utilization ratio for overall debt and individual credit cards under 30%. Credit score improves with the decrease in this ratio.
  1. Credit report – Read your credit report carefully and report any factual errors to the concerned credit bureau to correct them. Send all your financial statements as proof of payments. Once the mistake is rectified, your credit score will jump up.
  1. Expenses – Refrain from impulsive purchases and remain in your limits. Don’t close any credit accounts; instead keep them in a safe place.

Credit repair companies can also help you to improve your credit score. However, it is very important to verify the legitimacy of a credit repair company before getting any help from them. This will prevent you from falling into a scam.

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