Most people have a file, known as a credit report, that lets lenders know how risky it would be to loan them money. Borrowing and paying back debts and making monthly payments for services like insurance gives you good credit. The better your credit, the more you can borrow. Failure to pay debts and filing for bankruptcy gives you bad credit. Bad credit makes it difficult to borrow and get loans for cars, homes or businesses. There are measures you can take to repair bad credit.
Credit Repair Scams
Don't get scammed by TV or online advertisements claiming that their business can erase bad credit or remove judgments against you. According to the Federal Trade Commission (FTC) no one can legitimately erase all debt over night or remove bankruptcies. Real credit repair takes time, effort and consistent repaying of your debt. The FTC website lists other signs of credit repair scams, including; asking for payment before giving services, refusal to tell what actions you could take for free or offering to give you a "new" credit identity.
Free Credit Report
Under the Fair Credit Reporting Act (FCRA) you can request a free copy of your credit report once every 12 months. There are three national credit reporting companies; TransUnion, Equifax and Experian, each of which must give you a free annual copy of your report. You'll have to provide the company with your name, address and Social Security number. The report will give you an idea of how your credit stands and what you can pay off to repair it. However, your credit report will not tell you your FICO score, which many companies use to determine our creditworthiness.
FICO Score
Your FICO score is based on your credit report; it's a number that's often used to determine if you can open a credit card account or take out a loan. FICO scores are calculated by combining aspects of your credit and weighing different percents of those features. FICO scores are based 35 percent on payment history, 30 percent on amount owed, 15 percent on length of credit history, 10 percent on new credit and 10 percent on the type of credit you use. The FICO score calculation results in numbers between 330 and 830. If you have a high FICO score (over 726) you can get more credit with better rates. Anyone with a FICO score of 550 or lower is considered a high-risk borrower.
Paying Off Debt
You can improve your credit report and FICO score by paying off debt and adding stability to your report. Pay "delinquent" accounts first and deal with any loans that have gone to collections agencies. If the payment are too high for you, call the creditor and negotiate lower payments for yourself. Once past due accounts are paid and you're making current payments you can take on additional loans. Refrain from borrowing more than you can afford to pay off or you may end up restarting a bad credit cycle.
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