Repairing Your Credit Reports
There are three major credit reporting agencies (CRAs) in the United States: Equifax, Experian, and Trans-Union. All three of these companies do the same thing: They receive information from creditors about how borrowers are paying their bills, and they provide that information to prospective lenders (and some others, such as landlords or employers) upon request.
Credit reporting agencies do not make lending decisions. They don't approve or deny loans. They just provide information, whether it be positive and negative, to lenders who do make those decisions. The more positive information, and the less negative information, that your credit report contains, the higher your credit score will be.
Positive information, as far as your credit score is concerned, includes timely payments of bills, having two to four established "bank cards" with low balances as percentages of their credit limits, and living at the same address and holding the same job for long periods of time (several years or more).
Negative information on your credit report can include late payments, missed payments, high credit card balances as a percentage of the cards' upper limits, charge-offs, accounts in collection, frequent inquiries from lenders (suggesting that you're desperate to get a loan), too many credit cards, too few credit cards, accounts settled for less than the amount owed, and the atom bomb of bad credit entries: bankruptcy.
The law allows bankruptcies to remain on your record for ten years, and most other information for seven years. Every positive entry on your credit report will raise your FICO score, and every negative entry will lower it. That's really what it comes down to, although the exact mathematical formulas are both complex and proprietary.
What is a FICO Score?
A FICO score is a number between 300 and 850 that is alleged by Fair, Isaac & Company (FICO) to be "the numeric representation of your financial responsibility, based on your credit history." Higher numbers are better and will make it easier for you to get a loan (or better terms on a loan) than lower numbers.
A FICO score is derived based upon the following factors:
- Payment history: 35 percent
- Amounts owed: 30 percent
- Length of credit history: 15 percent
- New credit: 10 percent
- Types of credit used: 10 percent
Each of the above general factors include many sub factors, which you can read about for yourself here, if you like. What it all boils down to, however, is the same thing we said a few paragraphs ago: The more good information, and the less bad information, in your credit report, the higher your FICO score will be.
Bankruptcy is the absolute worst single entry that can wind up on a credit report. But on the other hand, most people who file for bankruptcy already have pretty crappy credit scores by the time they decide to file, so bankruptcy can (and should) be considered a chance to rebuild your credit, rather than a financial death sentence.
In addition, a FICO score isn't based only on bad information. The effect of bad information will be partially offset by good information, such as a good payment record on your secured credit card or other timely payments that are reported to the credit agencies. So a good first step to cleaning up your credit is to obtain a secured credit card from a lender who reports to all three agencies, and then religiously pay your bills on time.
Don't forget that "paying your bills on time" means paying all your bills on time. If you miss a payment on an electric or gas bill, a landline phone or postpaid cell phone (but not a prepaid cell phone -- prepaid carriers will shut off your service, but they won't ding your credit), or practically any other kind of bill, it will hurt your credit score. So what it comes down to is this: Pay all your bills on time.
But even with a perfect payment record post-bankruptcy, the negative entries remaining on your credit reports will drag your FICO score down big-time. Wouldn't it be great if there were a way to remove some of that bad information? Well guess what: There is.
The Fair Credit Reporting Act (FCRA) requires credit reporting agencies to delete information that is inaccurate, incomplete, outdated, or unverifiable from your credit report once you bring it to their attention by filing a dispute. The agencies are then required to investigate by contacting the original creditor. If the information can't be verified, the entry must be deleted.
Let's be clear about this: There is no way to legally force a CRA to remove negative information from your credit report if it is accurate, timely, and verifiable, no matter what a credit repair company may tell you. But information that can't be verified must be deleted -- no matter how "true" it may otherwise be.
In other words, the fact that an entry may be correct doesn't mean it can't be removed. It has to be verifiably correct.
Some people have moral reservations about disputing information that may, in fact, be correct. If you feel that way, then don't do it. But sometimes it's hard to tell which information on your credit report should be there. Debts that had been charged off or sold often are listed multiple times. Other debts may may have been paid or settled while in collections. Disputing these entries merely forces the CRA to verify that the entries are accurate and timely.
What this means for people recovering from bankruptcy is that negative entries on their credit reports can sometimes be removed simply because they're no longer verifiable. Most banks don't keep information about borrowers on file forever. Information has to be stored on computer databases, and database storage costs money. Databases also get cranky and prone to tantrums when they grow too big, so most banks "prune" their databases of old accounts that have been closed for a while. That makes those accounts unverifiable, and unverifiable entries must be deleted.
In addition, banks and other lenders are notoriously sloppy about record-keeping. This is even more true when a bank is taken over by or merged with another bank. A lot of times, information about "old" accounts is lost or discarded along the way, making any entries based on those old accounts unverifiable.
Even bankruptcies can sometimes be removed. This is kind of a hit or miss thing. What you're hoping for is that when the court is contacted to verify the bankruptcy, bureaucracy at its worst prevails, and the court fails to verify the bankruptcy within the allowable time. Again, if it can't be verified, it must be deleted -- even if it's a bankruptcy.
How to Remove Bad Information from Your Credit Reports
In theory, it's pretty easy. First obtain copies of your credit report. You can get them for free, once a year, by going to AnnualCreditReport.com and answering a few simple questions. Once you receive them, read them thoroughly and start by picking out the oldest negative entries. Then write letters to the credit reporting agencies disputing the accuracy of those entries and requesting that an investigation be initiated. The letters should be as brief as possible and provide only the following information:
- Identifying information about yourself (name, address, and Social Security number).
- Identifying information about the item you are disputing, including the account number only if it already appears on the credit report.
- A statement that you are disputing the item because you believe that it may be inaccurate and is causing damage to your financial reputation.
- A request that an investigation be initiated, and that the negative entry be deleted if it can't be verified, in accordance with the Fair Credit Reporting Act.
And that's it. Don't provide any additional information. You are not required to do so, and doing so may in fact prove that the entry is correct. For example, if you provide an account number when none was listed on the report, then you are self-verifying that the account did exist. You don't want to do that.
The only times that you should provide additional information is when you can prove (with canceled checks or other actual evidence) that a debt was timely paid, or when there are accounts listed on your report that you know for a fact weren't opened by you (or your spouse, etc.).
Professional Credit Repair Services
Many people choose to use professional credit repair companies to fix their credit. This can be a very good or a very bad decision.
On the positive side, a good credit repair service may increase the speed with which negative entries are removed from your credit report, as well as save you a lot of time and annoyance. They'll also protect you against some of the games that credit reporting agencies play to try to trick you into verifying negative entries yourself.
On the negative side, credit repair companies don't do a single thing that you can't do yourself. In addition, good credit repair services aren't that easy to find. They're out there, but they exist in an industry full of scam artists. So how do you find a good credit repair service?
The first step is to make sure that the firm is in compliance with the Credit Repair Organizations Act (CROA), which requires (among other things) that credit repair services must:
- Not charge you in advance for services.
- Not make false claims about what they can do (for example, guaranteeing that they can remove a bankruptcy from your record).
- Not perform any services without a written contract, signed by you.
- Give you a three-day waiting period during which you can cancel without penalty without paying any fees.
Beyond this, you may want to ask your bankruptcy lawyer whether he or she knows of any good credit repair firms, as well as check out any firms you are considering with the Better Business Bureau.
Again, there are good credit repair companies out there who can make recovering from bankruptcy a whole lot easier. Unfortunately, there also are a great many scam artists. So do your research, choose carefully, and have your lawyer review any contracts before you sign them.