How credit agencies determine your credit score

Now that you have your credit report, the three main credit reporting agencies are Experian, TransUnion, and Equifax.  Since some lenders only report to one of these three companies, you will probably have three different credit reports and credit scores based on the different information each one has about you. 

Most companies that lend you money will report your activities (on time payments, non-payments, credit lines, etc.) to at least one of these credit agencies.  These credit agencies are private companies and are not owned by the government, most people think they are somehow owned by the government which is huge myth.

Your credit score is determined by the following estimated % breakdown:

• 35% Payment history

• 30% Outstanding debt

• 15% Length of your credit history

• 10% Recent inquiries on your credit report

• 10% Types of credit in use

Below is a table showing a sampling of possible different score ranges and how they can affect a mortgage payment:

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Once you've received your credit report, look at the percentage breakdown above and focus on the things that will help you increase your credit scores such as payment history, negative items, and outstanding debt.  

Some lenders will look at the scores from all three reports, while some might only look at one.  Remember, you don't lose any credit score points for checking your own credit report. 

You will lose some points if there a number of credit inquiries over time for applications such credit cards, auto loans, department store credit cards, etc. that you have initiated.  Think about this next time you get an offer for 10% off your purchase just for signing up for a store credit card, and just say no!  Only apply for credit cards if you actually need them, have less than four open credit lines, or are pretty sure you will get a large credit line when you get approved.

You should never apply for credit if you are not very confident that you will get approved. You might save $20 now, but you could lose much more than that later due to a lower credit score.  Plus if you forget to make payments, it will really negatively effect your credit score, and you might be charged late fees, etc.  Store cards usually carry the highest fees and interest!  If you need a credit card, we recommend getting the Applied Bank Credit Card because they will offer you a credit card based on your exact credit score and you can use the card anywhere that MasterCard is accepted.

Also, if you are shopping for a car or mortgage, try and keep all the inquiries to within four weeks because credit scoring companies will only treat all these as one "inquiry" on your credit report, instead of multiple inquiries.

Another key thing to remember is your credit score is not based on how "clean" your credit report looks.  You may have many things on your credit report that drag on for years, but remember these are good things since they show a long credit history.  As long as they don't show late payments, they are adding points to your credit score - because you have proven to be a reliable consumer who can pay back debts in a timely matter.  (Lenders are really looking for these types of people, consumers who take on debt and then pay it back on time.)  Only focus on that are negative, and especially recent items (within the last 3 years) first.

Don't bother contacting old vendors and trying to close accounts since it might actually hurt your score!  The items you are very interested in are late payments, judgments, delinquencies, etc. that are within the last 3 years at first.

You can close accounts that are less than a year old, however we recommend focusing your energy on things that can really make a big difference.  If you have negative information that is over 7 years old on your credit report, go ahead and dispute it since most of these items can be legally removed.  (More on disputing credit report items later)

Hiring a Professional Credit Repair Agency?

If you are thinking of hiring a professional credit repair agency, we recommend getting your credit report first, and then seeing how much work you need to do.  If your score is low because of high debt levels, hiring a credit repair agency is not a good idea since they can't help you pay back your debts.

However, if your credit score is low because of late payments, derogatory (negative) items, judgments, liens, etc. - then instead of doing the work yourself of trying to remove these negative items, you may want to hire a credit repair agency to do the work for you. 

Credit repair agencies do the leg work for you (it's like mowing the lawn, you can either do the work yourself or pay a landscaper to do it for you) to save you the time and hassle of learning what to do and actually mailing out the letters and tracking responses.

If you do decide to use a credit repair agency, we recommend using The Lexington Law Firm.  The credit repair business has received a bad reputation, so you need to be careful about who you use.  The Lexington Law Firm has been around since 1991, has over 500,000 satisfied clients, and they are the industry leader in this field.  Their fees are very reasonable ($39/Month), and again will pay for themselves many times back once they have raised your credit score.  If you are thinking about using a professional credit repair agency to help you, (remember, it is legal to repair your credit and The Lexington Law Firm uses only legal methods) you should consider using The Lexington Law Firm because of their great reputation in getting results.  We recently polled some of our users and here is a response we received back from a customer about the Lexington Law Firm:

The Lexington Law Firm also offers a money back guarantee based on how many negative items they have removed, which most credit repair firms DO NOT DO.  This is one of the major reasons why we recommend The Lexington Law Firm, they are not afraid to backup their words with guarantees.  If The Lexington Law Firm can't remove negative items for you, you will get a full refund for any amount you paid them.  Very few credit repair companies offer this level of guarantee.

Books and Repairing Your Credit Yourself?

A word of caution: There are many internet sites that charge you a small fortune for an ebook or even some "secret software" that will tell you "insider" ways to increase your credit score.  What you need to understand is that these books mostly contain the same information - they recommend disputing negative items, removing debt and increasing credit lines.  You should also know that credit agencies are on the lookout for standard dispute letters, so using standard dispute letters found in software packages will probably not work very well.

Some of these sites will even tell you do things that might be illegal.  Whatever they tell you, it involves work dealing with the three credit agencies, collection agencies, and other various parties that are on your credit report.  That is why we recommend using a Credit Repair Firm to do this work for you IF you don't have the time to do it, and don't want to do the work yourself.

However, if you can't afford to pay for a Credit Repair Firm, you can still do the work yourself.  If you do decide to go at it yourself, I recommend signing up for our  credit score email course first.  Going through the free course will give you the basic and intermediate knowledge of how credit scores work, and will help you with:

• Step by step instructions on how to read your credit report and find negative items affecting your credit score the most.  Then use that information to prioritize on what to focus on first, so you can see results fast.

• Teach you how to effectively deal with old debts with collection agencies.  This lesson alone can save you thousands of dollars, and rapidly change your credit score for the better.

• How to negotiate your old debts for less than 50% of what you owe.

• Give you insider information on how credit scores are calculated and why most folks do the exact wrong thing to try and improve their credit.  (sometimes removing negative items can actually hurt your credit score!)

• If you have a bankruptcy listing, how to make sure it is listed 100% correctly on your credit report.

• Tips on creating a good credit profile so your credit scores stay high.

• Insider information how many credit cards, debt, and other factors to make sure your credit score is as high as possible in the future.

• How to best approach removing late payments.

• Insider tips on how to get great credit card offers so you can build you credit faster..

If after reading this free tips page, you think you still might need more detailed help in increasing your credit scores, then you should sign up for our credit score email course.  We recently had a third party survey folks that had taken our course, and as you can see below over 85% of our users rated this course as either "excellent" or "good":

 Increasing your credit limits and creating credit history

If you notice the chart way above, 30% of your credit score is based on outstanding debt.  To understand how this works, look at this example:  If you have 10K in debt with a 15K credit limit, your ration is 2/3 or 67%.  (Find out your exact Credit Ratio by using one of our recommended credit report vendors)

However, if you increase your credit limit or pay down your 10K in debt, you will lower your credit ratio to 50% or less - which will help your credit score immediately.  We always recommend our customers do this first - if they can afford to, because it is very easy and fast.  You can also try and have your credit limits raised, however if you already have a low credit score - it may be very hard for you to increase your credit limit.  Please note that you should only do this on amounts you currently owe money on, not old debts! (more on this later)

More credit score tips - how to dispute items on your credit report - yourself

The first thing you need to do is to make sure everything on your credit report is correct and 100% accurate.  It is important to understand that creditors MUST PROVE the information they put on your credit report.  You are innocent until they prove you are guilty, not the other way around.  Go through your report with a pen, and mark things you think are inaccurate or incorrect first.  If you see something inaccurate, make sure you dispute it with the Credit Agency.  (more on this below) You can dispute it by way of phone, letter, online or via email.  We always recommend doing it with a letter.

If you have negative items on your credit report that are older than 7 years, go ahead and dispute them since they should be removed.  There is no law that says things have to stay on your credit report for any length of time.  Remember, the big credit agencies are either public or private corporations, NOT government entities - and you have the legal right to dispute information that may be incorrect on your credit report.  This is a very important point - the creditors have to be able to prove the information they are reporting to the credit agencies is 100% accurate.

How to dispute items

I recommend using a hand written letter to dispute incorrect items with Credit Agencies.  I have supplied a sample Credit Dispute PDF form here that you can use for free.  Make sure you mail the form via registered US mail and note the date it was mailed along with the receipt.  If you are going to use a letter dispute form, again make sure you use your own handwriting - because it lets the credit agency know that the letter is a real dispute letter and not just a computer generated form letter.  This technique usually works the best - the less professional the letter, the better! 

How Credit Disputes Work With Credit Agencies

By law, the creditor (vendor) must prove the accuracy of what you are disputing within 30 days. If they don't, the item is simply removed from your credit report. If you have additional evidence that proves your case, then submit a copy of this evidence with the dispute form - and they will have to remove the inaccurate data within 30 days or prove that it's accurate. 

Even it you don't remember if it's 100% accurate, dispute it anyway because the creditor will have to prove that the information is accurate.  Many times they can't do this since they might have lost the records, don't have the time to deal with it, etc.  A good time to dispute is around any holiday or busy time, where the vendor may not have the time to respond to inquiries because they are busy selling new items, not worried about debts from many years ago.

How to Remove Negative Items

Our credit score course gives a wealth of information on how to remove negative items from your credit report, including sample letters you can use.  An approach I have used to remove late pays (30, 60, 90, etc.) is to mail a letter explaining why I was late, and asking the creditor for their "goodwill" to remove it.  This usually works well if you have a current relationship with the company, for example a current credit card.  (another reason not to cancel old credit cards!)

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Negotiating with Creditors and Collection Agencies

Our negotiating advice is to offer to pay 40% of your debt and negotiate upwards from there, however only if they remove your bad credit history off your credit report. (Not just have it marked "Paid", very important!)  Make sure you get this in writing.  Most agencies will take the opportunity to collect the bad debt and happily remove some of the bad credit history from your credit report, instantly helping you to increase your credit score.  Also, I recommend paying these agencies with a money order, and using a return receipt.  The less information they know about you the better - so DO NOT get friendly or chatty with them! (never say I need to fix this so I can buy a house/car, etc.)

For example, settling a $2,000 debt for $1,000 and having the agency remove some of the bad credit history on your account will dramatically increase your credit scores, and will be well worth it since you will be saving much more money on lower future interest costs with the higher credit score.  Negotiate hard with these agencies, but remember your goal is to get the bad credit history removed from your report, and again remember to get everything in writing.  Removing these items will dramatically increase your credit score since derogatory items are weighed heavily in your credit score calculation.  Again, for more help in this area you may want to look at our credit score course.

Note:  If you have already paid off these derogatory items, sometimes disputing it with the agency or original creditor again may work since it will be their burden to prove the bad credit history, and they usually wont bother disputing it since it's already been paid off and it's even more work for them.  However, I really recommend taking care of the issue before you pay off the debt, when you have the most negotiating leverage.  (before you pay them back a cent!)

Other Ways to Boost Your Credit Score

• Do you need credit history?  I recommend applying for the Applied Bank Credit Card if you have less than a 650 credit score - the higher credit limits and longer credit history you have, the higher your credit score will be.  Don't know your current credit score?  Get Your Free 3 Credit Reports and 3 Credit Scores Instantly Online.

• If your credit needs some quick boosting, and you have extra cash, pay down as much of your debt as possible. The lower your ratio of current debt to available credit limits the better you look to a lender, and the higher your credit score will be.  The flip side of this is to call existing credit card accounts you may have and ask them to increase your limit, though you won't actually use it.  You should do this as often as possible, even if you don't need the credit. This will also increase your credit score. Note: Do not open additional credit card accounts to increase this ratio, since that may hurt your credit unless you have under 4 open credit cards. But increased credit limits on existing accounts will help since you will be lower your overall debt ratio.

• Cancel some cards if you have too many, but if you are carrying debt try to  keep the ratio of debt to available credit limits at around 20%, with about four cards for the best credit score.  Don't cancel cards if it will put you below this ratio, and if you have to cancel cards make sure you only cancel ones with less than one year of history with.  Do not cancel cards that are older then one year, remember your credit score does not get points for being clean of old accounts!  Focus on doing the right things in order to increase your score, not cleaning up your report of old accounts.  Cleaning up may actually have a negative impact on your credit score, yet most people do this first!

• Another great way of helping your score is by spreading your debt to different cards.  Although you may pay more interest, your credit score will improve since not all your debt will be on one card that is close to it's credit limit.  For example, if you have 20K limit on one card with 18K of debt, and have another card with a 15K limit with 2K of debt, its better to move 8K of debt from the higher card to the lower card.  By doing this you will lower your ratio of debt to available credit on the one card, helping your credit score even though you haven't really paid anything down!

• Pay your bills on time by having them automatically deducted from your bank account or paid online before they are due.  Being consistently late with payments is the easiest way to lower your score, and also the easiest way to keep your credit improving month after month - just pay your credit card bills on time or early! Even if you can only swing the minimum payment, get the payment there before the due date. Most credit card companies allow you to pay online, so make sure you take advantage of this and don't waste time and money on stamps and mailings.  Keep the amount of credit cards you have to a minimum, so you don't forget to pay them.  (No store charge cards!)  Remember, only apply for cards that you really think you will get approved for.

• Use credit cards for everyday purchases, then pay your credit cards in full monthly.  Charge as much of your monthly bills as possible on your credit cards, then pay them off every month.  If you happen to use a debit card, these transactions do not usually appear on credit reports.  By using Credit Cards, you help build credit history and this helps increase your credit score.  Remember, if you are carrying a balance on any credit card, do NOT use it for everyday purchases since you will be paying interest from the first second you buy something new on that card.  If you are not carrying a balance, the credit card company will not charge you any interest as long as you pay it back in full every month.  This is a key point to remember!  Only do the above if you have the self-discipline to pay back your credit card every month.  Again, if are carrying a balance, do not charge anything on the credit card that has a balance!

• If you have no debt and have had no credit history within two years, go get some!  Even though you don't need to fix your credit score, you do need to create some credit history. This may sound strange to take on debt, but it works very well since it shows you can borrow and pay back large amounts of cash. Begin responsibly using a credit card for as much as possible and pay it back in full every month, or you can even leave a little bit of debt on it. (less than 30% of the limit).  Or take out one of those promotional low % point loans from one of your credit cards for up to 50% of your credit limit, put the cash into an account, and pay it back slowly (but before the special interest rate expires -- and don't spend it!).  You will notice your scores dramatically improve after you have paid back the debt since you have now created good credit history.  Remember, it's never too late to start building your credit and since it takes time, take the right steps today.

• By looking at your credit report, find out how often and when your lenders report.  By timing your payments to right before they report to the credit agency, you will be able to show less debt and thus have a higher score!  Again, this is why it's important to get your credit report to learn what is out there so you can find out what and when things are being reported.  Even though you may have the same debt, by timing payments you can increase your score since your debt will appear in the best possible light for that time of the month.

• If you have a very low credit score and need help rebuilding your credit, you might want to try this method of creating positive credit history.  First, go to your local bank and setup a savings account for $1000 for example (the more money you use, the better). Then, ask for a secured loan for $1,000 against the deposit.  Most banks will give this to you since they have no risk, if you don't pay them back they simply take the $1000 you deposited.  You can then go to another bank, and do the same thing with the $1000.  (I don't recommend doing this with more than two banks!)  Then pay back the loans, deposit more money, and take out another loan and keep paying it back.  By doing this, you will be creating recent, positive credit history since the banks will report to credit agencies that you paid back your loans within a short amount of time.  Another benefit is that you will not be out any real money, and your only cost will be the interest on the money which should be minimal compared to the positive credit history you are creating.

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  One More Great Tip:

A Quick Word of Advice About Credit Cards

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