14 Common Misconceptions About Credit Repair:
- Repayment terms can’t be negotiated
- It’s good to keep (and pay off) large balances
- You can’t change negative credit report entries
- A bad credit score can never be made excellent
- You must keep paying a balance on each card
- You start with a perfect score
- Your credit report must be perfect
- You will see results right away
- There is only one credit score
- A score of 600 is “enough”
- You need a credit repair company to make meaningful changes
- Credit repair companies are a scam
- Checking your credit harms your score
- Closing accounts helps your score
Trying to fix a bad credit score is never a pleasant process, but it is something which most people have to deal with at some point. It’s important to have the right information, so that you can get back on track as soon as possible. This list will detail the most common misconceptions, which can lead to credit repair taking much longer than it has to.
While many people think that they won’t be able to improve their credit score, or that they will do more harm than good. In reality, it’s never been easier to make lasting changes to your credit report without changing your financial situation. It’s surprisingly simple to improve your credit score with good advice, and patience!
1. Repayment terms can’t be negotiated
If you are struggling to pay back your debt, and this is affecting your credit report, it’s possible to negotiate repayment terms with your creditors. The simplest way to do this is to identify which creditors are most likely to help you. Larger institutions, particularly credit card companies, have teams set up to help you negotiate a repayment plan.
Credit card companies have an obligation to help you repay your debts, they are able to offer one or more of the following:
- A temporary pause on interest and interest payments while you organize your finances (typically 1 – 6 months)
- Arrange a lower interest rate which brings repayments in line with your affordability
- A temporary pause on all payments if you are struggling to pay back interest
- A balance transfer to a more affordable card / plan
Here are some tips to bear in mind when trying to do this:
- Make sure that you confirm that a default will not be recorded on your credit file, some options involve this. A default (personal bankruptcy) remains on your record for 6 years and has a detrimental effect on your credit score.
- The terms that you are offered by the agent are negotiable. Make sure you ask for exactly what will help you, and explain why. Use the examples on this list for a guide on what is possible.
2. It’s good to keep (and pay off) large balances
Many people think that the best way to improve their credit score is to hold large balances on each card/credit line and to pay off the balance each month.
But this is only partly true
There are two things that credit rating agencies are trying to measure: your value as an interest-paying customer, and your creditworthiness when it comes to paying it back.
While making good use of your credit lines will improve your credit score (because it shows that you are an interest-paying customer), using a large proportion of your available balance will be detrimental. This is because using 80%+ of your credit is considered an indicator that you may struggle to pay it back. Credit utilization is combined across all of your revolving credit lines (credit cards, loans, not mortgages and leases). Therefore, the ideal way to structure your debt is to have the largest balances on the lowest interest-bearing accounts.
However, using anything more than 30% of your total available credit will start to negatively impact your credit score.
“A low credit utilization ratio is considered an indicator that you’re doing a good job of managing your credit responsibilities because you’re far from overspending. A higher rate, however, could be a flag to potential lenders or creditors that you’re having trouble managing your finances.”
Credit utilization has a large impact on your FICO score. Experian have estimated the impact to be 30%. This, therefore, should be one of the first things you address when trying to improve your credit score. Either by paying off parts of your debt, or by gaining access to more lines of credit.
3. You can’t change negative credit report entries
One of the most frustrating situations you may encounter trying to improve your credit score is checking your credit score and noticing an entry which you think is inaccurate. If you encounter this situation, there are things that you can do. Credit reporters (credit card companies ect.) make mistakes all the time.
The first thing to do is to check which credit bureaus/s hold the incorrect information on record. You can check your credit score for the three bureaus: Equifax, Experian and TransUnion on the Experian Credit Checker. The adverse entry may appear on one or more of them.
Once you’ve identified which records (and bureaus) you want to query, you need to open a dispute. This will not impact your credit score.
- Equifax has an online checker and dispute tool
- Experian lets you dispute online, by phone or by mail. More information
- TransUnion has an online dispute tool
4. A bad credit score can never be made excellent
It’s incorrect to assume that once your credit score has been poor or bad, it can never get back to being good or excellent. Your credit score is simply a measure of how valuable you are as an interest paying customer, and your ability to pay back debt. Someone who never used credit and never paid interest would have a bad credit score.
For this reason, by following the right advice and improving your credit report, when you manage to pay back part of your debt, you may find that your score is much higher than it was before. The reason for this is that by successfully managing your finances through a situation where your credit score has taken a knock, you show that you are resilient and trustworthy when it comes to paying off your debt.
The most important hurdles to cross before you can see your credit score moving into the higher tiers are as follows:
- Credit utilization: the ideal utilization is <30%, but moving from 90% towards 60% will have a positive impact on your credit report.
- Missed payments: having no missed payments for a period of 3+ months is seen as a green flag to credit reporters,
- Paying back principle: paying back a portion of your principle debt each month as well as just interest shows credit companies that you are managing your debt successfully.
5. You must keep paying a balance on each card
Although it’s beneficial to make good use of your credit lines, it’s sometimes more economical (as well as beneficial for your credit score) to move balances onto the lower interest-bearing cards.
As discussed, credit utilization is summed across all your credit lines, so if you are paying 18% on one card, and 25% on another, it’s beneficial to move the balance of the higher paying card to the lower paying one.
To do this, you need to initiate a balance transfer. It’s important to speak with your provider to see if they will accommodate this. Alternatively you can shop around for cards with balance transfer options.
6. You start with a perfect score
Remember, your credit score is simply a proxy for your value as an interest paying customer, as well as your ability to pay it off.
Someone who has paid very little interest will not have an excellent credit score for this reason. Neither will someone who has not taken on much debt. The secret to getting a high credit score is to take on a reasonable level of debt (<30% of available credit), and to pay back interest every month. It takes time to build up enough of a credit record so that you are considered trustworthy by the credit rating agencies. This is why young people often struggle to build a good credit score and get access to cheaper credit.
Let’s break down the components of your credit score to help you understand what it is measuring, and why.
Components of Credit Score
|Component of Credit Score||Proportion of Total FICO Score||What it’s Measuring||How you Can Improve|
|Payment History||35%||Missed payments||Don’t miss payments, instead speak to your creditors about a payment plan|
|Credit Utilization||30%||How much of your credit you are using vs how much you are being offered||Use no more than 80%, but ideally less than 30%|
|Age of Credit||15%||How able are you to pay back debts vs accumulating more. How many new credit lines are being opened||Pay back the oldest debts first. Only open credit lines when you need them|
|Credit Mix||10%||How much credit card debt vs long term debt (eg. mortgages)||Reduce the proportion of credit card debt vs total debt.|
|Credit Inquiries||10%||Negatively impacted by hard credit searches (performed only when you are inquiring about a new line of credit||Check your credit report using soft checkers, only sanction hard checks when you need new credit.|
7. Your credit report must be perfect
It’s possible to maintain an excellent credit score, even with several adverse listings on your credit file. It is rare to by no negative entries on your credit file, and credit agencies know this. When you are offered credit, you are being compared to other people seeking credit, rather than to an ideal example.
While it’s important to minimize negative credit entries, your main focus should be on improving your score month-to-month.
Contents of Credit Score
To get access to the cheapest credit, you want to have a good to excellent score, but it’s not necessary to access good quality credit.
8. You will see results right away
Credit agencies review and recalculate their scores each month. Therefore, it will take a minimum of 30 days to see a difference on your credit file. In practice, however, it’s not uncommon to wait 6 months before a noticeable impact is made on your credit report.
It’s very important to remain patient in this time period, because it is the most crucial for credit repair. As you improve your financial situation, and follow the correct steps, credit agencies want to see you keep this up for some time before they adjust your score to reflect your improved creditworthiness. It’s not uncommon to see minimal improvements each month, followed by large jumps at key intervals such as 3 or 6 months.
This is echoed by the professionals:
“70% of Lexington Law clients who saw a credit score increase had an average increase of 40 points in six months”
9. There is only one credit score
However, there are only two main credit scores used throughout the industry. FICO score and Vantagescore. FICO scores are used for 90%+ of financial decisions in the US. Vantagescore is a result of a collaboration between the 3 major bureaus and is used slightly differently.
Experian uses the standard FICO score which most financial institutions will refer to, so it’s often the best port of call when checking your credit report. TransUnion and Equifax both use Vantagescore. It’s important to consider the differences between the different types of scores, but bear in mind that only Experian uses FICO (the industry standard for companies checking your score). If you are focusing on one score, FICO is the place to start.
10. A score of 600 is “enough”
Having a score of 600 would put you in the bottom 1/3rd of Americans. This may be enough if you are struggling to pay back debt, but you should aim much higher if you are trying to repair your credit and gain access to better loans.
If you are able to pay back your debt (as well as interest), it’s a good idea to aim for a score of 850. This would put you in the “exceptional category” (the top 25% of Americans) which opens up many new credit options. By following the advice listed here, it’s possible to achieve this relatively quickly. The most important factors are patience and consistency.
The credit band you are in will have a huge influence, especially in car loans and mortgages.
11. You need a credit repair company to make meaningful changes
Many people assume that they are unable to repair their credit themselves, and need a professional to do it for them. Unfortunately, those who need credit repair the most are normally not able to afford this.
It’s never been easier to repair your credit score yourself, as long as you equip yourself with the information you need and maintain a consistent effort over time. Meaningful changes can be made to your credit report relatively quickly; by shuffling credit between accounts and negotiating with creditors. Rather than avoiding the topic of credit, making these changes can make it more affordable, and set you up for success in the future.
12. Credit repair companies are a scam
While credit repair companies are not necessary, they can be very helpful for certain situations. If you are unable to manage your credit yourself, or don’t have the time, credit repair companies are available to manage the process for you. They are armed with the knowledge and contacts they need to efficiently move the needle on your credit score.
They don’t, however, have any information which you don’t have access to online. There are no industry secrets to improving your score. So don’t assume that they are necessary, but don’t rule them out if it makes sense for your situation.
13. Checking your credit harms your score
There are two types of credit checks: hard and soft. Soft checks are normally performed by credit reporting agencies, but hard checks are necessary for credit providers looking to offer you credit.
|Hard Credit Check||Soft Credit Check||Hard or Soft Check|
|Applying for credit card||Loan / credit pre-approval letters||Apartment rental applications|
|Applying for car / personal loan, mortgage ect.||Checking your credit score||Opening a bank account|
|Getting a phone contract||Employer background checks||Getting a utility contract|
|Requesting a credit limit increase||Getting an insurance policy||Financial identity verification|
|Minus 1–5 points||No credit score impact||Minus 0-5 points|
14. Closing accounts helps your score
You may think that closing credit lines would help your credit score, but in fact in most cases it is harmful.
Credit lines should only be closed if they are preventing you from opening cheaper credit lines. For example, if you have a card paying 25% interest, and are being rejected by a 0% provider because of having too much available credit, it may be beneficial to close that credit card.
It’s harmful to your score because it reduces your available credit
Total credit used / total available credit = credit utilization (%)
By reducing your total available credit, you are increasing your credit utilization. This will have a harmful effect on your score because of the large impact that utilization has.
It’s much easier than many people think to repair your own credit. However, it’s essential to take the correct steps without falling for misconceptions. Let’s recap the 14 most common misconceptions by summarizing them as tips for you to follow:
- Always try to negotiate repayment terms
- Pay back large balances, but don’t use too much of your available credit
- Keep an eye our for (and dispute) incorrect credit file entries
- Aim for an excellent score, it’s easier than you think to repair
- Keep paying balances, but prioritize higher interest, then older credit
- No one starts with a perfect score, prove yourself trustworthy and pay your interest
- Your report doesn’t need to be perfect, credit agencies take into account that you are a human
- Results take time, have patience and keep up efforts for as long as it takes
- Remember there are two main credit scores, consider reports from FICO (Experian) as well as VantageScore (TransUnion and Equifax), but prioritize your FICO score.
- Don’t stop trying to improve your score until it is excellent, it has drastic impacts on your loan APRs
- You don’t need a credit repair company
- Consider a credit repair company only if you don’t have the time / resources to do it yourself
- Check your credit as much as possible, soft checks don’t hurt your score
- Don’t close accounts unless it will gain you access to cheaper credit