Adam Bjerk

How to Clean Credit

So, you want to learn how to clean up your credit. This is good, as having a high credit score has never been more important. While interest rates are down, you’ll still need to have a decent credit score to secure a loan. A few years ago, I imagined that these scores were compiled and calculated by mysterious, CIA-like shadow men. This is not the case. The credit scores are based on a mathematical algorithm created by the company Fair Isaac, which sells this information to the three main consumer credit companies—Equifax, TransUnion, and Experian. What you’re left with is a FICO score, which gives you a number ranging from 300 to 850. The magic number is 720; at or above this number you’ll be rewarded, but if you score below the 680 to 690 range, the math will penalize you . . . just like in high school. I should note that there is another credit scoring system called VantageScore, which is gaining some acceptance; however, the FICO score is still by far the most widely used system. To learn how this score is determined, look to the bottom of this page.

Learning how to clean credit may literally be life changing. Whether it is fair or not, the effects of a credit score are far reaching. Possessing a low score—or like me, having no credit history—will impact your chances of securing a loan (or at least an affordable one) for a home, car, or anything else. An illustration: Let’s say you take out a loan for $100,000. The difference between a superior score and a dismal score could mean as much as 2%–4% interest on a thirty-year fixed loan. With that depressing score, you’ll being paying at least an extra $120 a month, and at least $50,000 more in total interest . . . if you’re lucky enough to get a loan at all. Beyond loans, a low credit score will hinder your capacity to obtain affordable, quality health insurance, or any other kind of insurance. Even renting a place to live may prove difficult, as many landlords look at credit scores. As you can see, learning how to clean credit is vital. Below you’ll find common sense ways to do just that.

Cleaning Your Credit

Before you can clean credit, you need to be patient and refrain from any rash decisions. Indeed, haste may be the reason you’ve found yourself with a FICO score of 600. Though your credit score may have gone south rather quickly, it will take some time to repair. Don’t fall for some “fix bad credit fast” nonsense. These are scams. There is good help out there, but you’ll need to invest time comparing services, as many would like to take advantage of your situation and reduced confidence. The Better Business Bureau is a great place to start. If a business has their accreditation, there is a good chance they can be trusted.

Next, to clean your credit, you’ll need to see just how dirty it’s become by taking a good long look at your credit report. I’m sure you’ve seen the many commercials for companies offering the “3 in 1” credit reports, and some of the services and products these companies (like the one pictured) offer are truly beneficial; however, you can get a free credit report from all three consumer credit companies once every year at annualcreditreport.com. You may find that your credit score isn’t as bad as the used car salesman said it was . . . for obvious reasons.

Now that you have your report, work towards clean credit by attacking the entries that have lowered your score. Large outstanding debts are a first priority, but again, this will take time. Most debt collectors will be lenient as long as you are paying something consistently. You may find inconsistencies in your report. This is not uncommon. An inaccuracy may be the result of identity fraud, but more often the culprit is human error. If you find a problem, you can call any of the three consumer credit companies, but skipping their automated voice systems through e-mail may prevent suicide.

The next step towards clean credit is setting up a strict monthly budget. This may seem like common sense, but it truly is the best way to alter the lifestyle that got you into trouble. Your budget should be detailed down to the penny and should include categories like food, gas, bills, savings, and, of course, entertainment. Look to reduce spending in any way you can; you’ll most likely find (like me) that you should have been budgeting long ago. It is important to remember that paying off the large, higher-interest bills first will save you oodles of money long term.

If you have moderate computer skills, a personal finance program would be helpful in creating a budget. These programs help people to create meticulous monthly budgets, set up spending limitations and develop savings targets. They also help you, via calendars, see exactly when all your bills are due. If you already do your banking online, many of these programs will allow you to actually pay your bills through the program. I’m a visually oriented person with sloppy penmanship, so this is perfect for me.

Seeing a financial advisor is one of the smartest actions you can take to clean credit. If you have bad credit, it could be the result of simple bad luck and circumstance, but it could also be because you were never properly instructed about financial matters. A quality financial advisor will help you budget, prioritize bills, diminish debt, and keep you informed about the frauds and scams that seek out people in trouble. A good financial advisor will also be able to help you with refinancing options, debt consolidation, and other specific moves to improve your situation.

What Makes a Clean Credit Score?

Whether or not it is ethical or fair, the variables that go into creating a credit score are private. That’s right—that FICO math is secret; however, there are some basic principles that are well known. First of all, your payment history weighs in heavily. Did you pay on time? If late, how late? Did collections have to send thugs after you? The next priority is outstanding credit (debt) vs. credit available. Using credit is a good thing, but keep those balances low. Length of credit history is also key (are you time tested?), as is if and how long you’ve owned a home (10 years is the magic number) and how long you’ve been employed at your current job. Opening many new accounts in a short period of time smacks of desperation, which will hurt your score. Having experience with many different kinds of credit—mortgages, finance company loans, retail credit, credit cards—will improve your score.

There are some other variables to take into account. For example, your occupation, how long you’ve been at your current address, and being old (above 50) helps. It will be interesting to see how credit changes in our mutating economic system.