Credit Repair

  • Why Bother Building Credit?
  • Building credit doesn’t just refer to improving the likelihood of you being approved for a loan. It fundamentally means that you are improving your ability to pay off a loan as a financial secure individual. By building credit, you are building your quality of life, because you are taking measure to ensure stability in your life through proper planning.

    While it is still unreasonable to assume that our credit scores can be used as a measure of the integrity of our lifestyle, but the process of building credit represents your ability to take control of your money, and stick to a reasonable financial plan. That being said, before we can start building credit, we need to understand how it is that credit comes together to impact our financial position. From there, we can begin to look at what aspects of our credit score have the greatest impact on our ability to secure credit, and what actions we can take to make the greatest improvements to our score.

  • What Makes our Credit Score?
  • There are hundreds of resources available out there that will help you to understand exactly how companies determine a credit score. I’ll leave the specifics up to those resources, but in general, you need to know that there are five key aspects to credit that have the greatest impact on your ability to secure credit.

    Of these five aspects, two of them alone have enough of an impact to make or break a score by themselves. This means that by looking at these five simple aspects of credit, we can change our financial position from sub-prime to prime in a matter of years. These five building blocks to work on are an applicant’s Payment History, Access to Unused Credit, Age of Total File, Diversity of Credit Experience, and Recent Credit Seeking Behavior.

  • Improving Payment History
  • A credit applicant’s score is greatly impacted by their ability to maintain regular debt payments. As much as 35% of a FICO score is composed of the applicant’s payment history, because it acts as such a strong indicator of an applicant’s ability to make future payments. Realistically, a single missed payment won’t have a massive impact on your score, but the trick is to remember that every additional missed payment with have an incrementally large impact on your score.

    However, the same is not the same for making payments, because they are expected. Given the importance of payment history as a metric going into credit score, we need to come up with strategies for making sure that we have funds available at the times when those payments are coming out. We can do this by examining a couple of reasons why it is that people miss payments.

  • Check and Machine Holds
  • A common misunderstanding that many people have about their finances surrounds the timeliness of their funds. Specifically, people tend to assume that transactions are instantaneous, because they do not see all of the events that happen in the background to facilitate their transactions. For example, people might assume that a debit card (POS) purchase or electronic transfer online occurs instantaneously. However, it’s important to remember that money still needs to travel and verify across communications networks and financial institutions.

    This can take anywhere between 3-5 days to occur, especially when the funds need to travel across multiple network providers. While this might be frustrating for some people, it’s important to remember that many financial institutions will actually compensate for this time period by back-dating payments, meaning that many people will not even notice that a time lapse has taken place, hence the assumption. The problems start to actually arise when dealing with more complex financial instruments, like checks.

    Many people have come to take checks for granted as a service from banks. We’ve been given them for free, and without any hassle for so long that we’ve forgotten the legal implications of these somewhat dangerous financial instruments. Mainly, it is important to remember that a check represents a financial obligation, and an implicit debt. Whenever we write a check, we are taking on a debt to pay a person the written funds.

    What’s more, since checks need to clear before the funds are actually accessible, many people fair to recognize that they will not receive the actual cash on a check immediately. For a check to clear it must be submitted to a clearing company, funds must be transferred out from the sending financial institution, and then received by the end institution. The end result is that check can take as long as 10 days to pass funds from one person to another, an extremely long time period if we are living from pay-check to pay-check.

    While again, many banks will cash a check right away if they either have a good relationship with you as a client, or have the time to call the other financial institution to make sure that funds are available, they might begin placing holds on checks in situations where the funds behind the check have become suspect. This means that you could be forced to wait as long as 10 days for your check to clear before you can access the funds.

    Lastly, many banks don’t necessarily sweep their bank machines every night. Because of this, many of them will put a delay on these funds until they have had a chance to make sure that the funds are physically in the deposit envelope. This delay can be even compounded if the deposit consists of a check, because the check still needs to clear after it is removed from the machine itself.

    Fortunately, many people will never recognize these logistical delays because their bank goes out of its way to clear funds in advance. It is not until that relationship with the bank breaks down that an individual in needs of funds to cover credit will find themselves without funds, and missing payments.

  • Funds Not Available
  • The most obvious reason as to why people will miss payments for debt is because they don’t have funds in their accounts. What’s not obvious about this sort of issue is the way in which funds might be missing. For example, a person might see that they have a balance on their account, but not realize that those funds are on hold while they clear (again, due to a check or a bank machine deposit). In this situation, many banks will list the difference as being shown in the ‘available balance’ of the account.

    As misleading as this may seem, customers will see that they have a balance on their account, but that their ‘available’ balance is actually zero, which means that they have no funds, even though their account has been credited with funds. This becomes increasingly confusing for people that are held responsible for missed payments for debt, even though they have every reason to believe as though they had funds properly in place at the time of the transfer.

  • Schedule of Payments
  • A major problem for many people trying to make payments is that their pay-checks may arrive at an inopportune time. While pay-checks may arrive on the first and second week of the month, mortgage payments come out at the end of the month, which might be a couple of days before, or a couple of weeks after the last payment come in. While we might very well have the wage to cover our obligations, it can be difficult to make sure that those funds stay separate for long enough to go out to the payment itself.

  • Solutions to Improve Payment History Score
  • While there is no quick fix for improving the payment history aspects of the FICO score, there are a couple of tricks that people can use to improve their ability to repay debt by navigating around the biggest hurdles. When dealing with holds on checks and deposits, discretionary overdraft agreements with the bank are a fantastic solution to facilitate cash flow timeline discrepancies.

    While they are still a smaller variety of debt product, they are still much more favorable than pay-day loan advances, and are fairly easy to secure. Alternatively, if you don’t qualify for the overdraft, it is sometimes possible to set up a ‘release agreement’ with the bank, which will have them immediately cash a check that you regularly bring in, based on the consistency of the check’s ability to clear (ie. the check has shown in the past that it will not bounce).

    When dealing with issues pertaining to available balances and scheduling, many people have found that credit cards provide an excellent source of bridging capital, because of the way in which they provide interest-free loans if the funds are paid back by the end of the month.

    By paying bills through a credit card, a portion of cash can be left in the account to pay for the loan payment as it comes through, and then the card can be paid off at no interest using the awkwardly timed income payment. Even an individual with a poor credit score can use a cash-secured credit card, and the end result is that the applicant will be building credit through both the repayment of the credit card, and the repayment of the debt itself.

    When making these payments, it is important to also remember that the frequency of payments is given as much weight as the size of the repayments. This means that it possible for an individual to build up credit by breaking down their payments into smaller amounts that are paid more regularly.

    Breaking up payments has proven to be a very good strategy for individuals to pursue when they are working with smaller, biweekly pay-checks, because it means that a portion of each of their checks can go towards the repayment of the debt itself. By scheduling payments to line up automatically with incomes, we are in the best position to make our regular payments, and therefore build up the repayment history aspects of our score.

  • Improving Access to Unused Credit
  • The second most important aspect of a credit score is the ability of an individual to access unused sources credit. Unused credit is measured as a proportion against the amount of credit that has currently been used, and represents the individual’s ability repay a new loan using existing lines of debt. This means that it is in our best interest to have debt products available to us, but to use them as little as possible.

    For example, if an individual has a maxed out credit card, their score will decrease because the proportion of unused funds to used funds has been decreased. However, by simply paying off those credit cards, the ratio shifts to be more in our favor, and the score improves dramatically.

    Realistically, the best way to manage this aspect of a credit score is to build access to credit before credit is actually needed. Additionally, it might be in our best interest to apply for smaller lines of credit first, before accessing a single larger loan. For example, it might be in our best interest to open up a credit card balance before applying for a loan, because we will get a better interest rate on the loan because of the new access to credit.

    Alternatively, it might be in our best interest to consolidate our credit card debt onto a single fixed loan a couple of months before applying for a new line of credit, because of the way in which the benefit from the consolidation outweighs the impact of applying for the consolidation loan itself. In essence, we would be borrowing to improve our credit score, and give us access to new credit capacity over the course of about a year.

    Lastly, a way to improve credit score is to consolidate lines of credit onto time-planned loans. In doing so, we increase the volume and frequency of repayments made, and free up the amount of unused credit on the account by transferring it over to the fixed-loan. This action will also usually give a better interest rate, because the bank likes the predictability of the payments.

    While this section is by the most flexible of the FICO composites, it is important to remember that trying to ‘beat’ a credit score by manipulating debt across different products will only create more problems than it will solve. Lenders will flag applicants that have applied for debt multiple times within a given period, especially when the funds are obviously being used to juggle around a single principle amount.

    There are also legal implications that are associated with debt that must always be taken into consideration. Realistically, it is always a good idea to take on third party council from a debt consolidator or financial planner when looking to consolidate or re-finance lines of credit, just to make sure that you are always taking the most practical steps possible.

  • Increasing the Age of a Credit File
  • Unfortunately, there is no way to turn back the clock on a credit file to increase its age. The only way to really make sure that the file demonstrates stability with age is to try and plan finances for the long term. If an applicant is looking to purchase a home in 5 years, it might be a good idea to start using a credit card now, and to maybe take out a small time planned loan for a car in the short term, so that the file shows a steady history building up to the time of the mortgage. Alternatively, small purchases and bills can always be juggled through a credit card that is automatically paid off monthly from the deposit account itself, so that the file itself can be opened as early as possible.

  • Increasing the Diversity of a Credit File
  • While the diversity credit products in a file only accounts for about 10% of its composition, it is important to recognize how it is that this 10% can be used to compound the positive impacts of strategies we use for some of the more meaningful aspects.

    For example, by opening up two credit cards, taking out a balance on both of them, and then consolidating the debt a few months later, we have increased our access to available credit, improved our ability to pay off the debt by taking it on as a time planned loan, increased the frequency of payments made by scheduling them out on the loan, and increased the diversity of the account by adding a new kind debt to the portfolio.

    By taking on this new kind of debt, an applicant is demonstrating an improved ability to pay off future debts because they are now more experienced with different kinds of credit products. While this experience is only worth an incremental amount on the overall score, it is important to recognize how diversification can magnify the positive effects of another strategy. The difference can mean saving a few full percentage points on your interest rate.

  • Reducing Tendencies for Credit-Seeking Behavior
  • The final way to improve a credit score is to make sure that applications for debt are only made as they are needed, and not consecutively. Every time an actual application for debt is made, it causes a small decrease to the individual’s credit score, because credit-seeking behavior is considered to be detrimental to an individual’s ability to actually pay off the loan itself.

    This becomes worse when we apply multiple times within a shorter time period, because of the way in which it demonstrates an increased desire for debt. Again, the only way to work around this one is to make sure that we have created a long-term financial plan that builds up to credit goals, and allows us to have access to credit before we actually need it.

  • Final Tips
  • Having reviewed these main strategies for each aspect of the FICO score, we can begin to look at a couple of inclusive strategies for improving credit over a period of time. Beginning with a long term financial plan that has specific credit benchmarks, we can improve credit by consolidating lines of credit into fixed loans that will improve the diversity of the overall debt file.

    From there, we can break the payments down in a way that lines up with our incomes, and therefore helps us to make the payments automatically on time. While managing this debt, we can use credit cards to manage smaller bills and payments so that the held funds are available for the debt payments when they come through, but the lines of credit remain generally available for future loans.

    Lastly, we can make sure that our plan builds up to our credit goal over time, so that we are not making multiple debt applications at once in a given period. In the event that we are starting off with a poor credit rating, it is important to remember that we can also restart by using products like cash-secured credit-cards to build up a base-line of payment history, which can later be consolidated and upgraded into a non-secured card to improve both account diversity and increasing unused credit.

    Regardless, the best way to build credit will always be to consult an experienced financial planner or credit consultant that can help to create a personalized plan that will create the most benefit possible for your specific circumstances.