How to Clean Up Your Credit
If you are planning on buying a new home or investing in a business, you may need to clean up your credit before applying for a loan. Lenders need to check your financial history to decide whether you will be able to repay the loan after a few years or not. Your credit report is prepared by credit bureaus and they receive information from companies that gave you credit in the past. This report normally contains information about any late payments or overdue bills. You can now request a free credit report online to understand your credit score and what it means.
Your overall credit score is also known as FICO. This score ranges from 300 to 850 and is different on all three credit reports received from three credit bureaus. Experts would tell you that your score needs to be way above 600 to be called a good score. If you have a lower score, you will have to pay a higher interest rate for acquiring mortgage. And in some cases your application may be rejected altogether because of a low credit score. So, you need to improve your FICO credit score before planning to invest in a business.
Basically your credit score is made up of five entities: payment history, length of credit history, new credit, types of credit in use, and total owed amount. There are ways to improve on all these areas to clean up your credit. Sometimes your credit report may contain misleading or negative information regarding your credit history. This can be corrected by appealing to the credit bureau and requesting changes to be made to your report. However, it is not advisable to call the credit bureau because they record all calls and may present them later on as evidence against your competence. Instead, write a letter to the bureau and send some supporting documents along.
The total amount you owe as debt is an important factor that largely determines your credit score. It is advisable to keep this debt under an acceptable limit. If the outstanding amount is high, defer your plans of acquiring a loan for investing in real estate and pay attention to paying the debt first. Some people close their old accounts to get a fresh credit report. However, this is a mistake which you should never commit. The length of your credit history is another major aspect that can have significant weight on your overall credit score.
Moreover, it is advisable to stick with a few accounts rather than opening new ones for no reason. New credit has 10% impact on your FICO score. The payment history section also mentions declaration of bankruptcy in the past in addition to late or overdue bills. You need to tell the credit bureau that a certain amount of your unpaid debt is due to the discharged items in bankruptcy. This is very important as the payment history section has 35% weightage in the overall credit score.