Basics of Credit

 

To repair your credit, you have to understand the details of how credit works. When you borrow money from a bank, a financing institution, or a private investor to buy a car, a home, or pay for a dinner dinner, the loan contract says how much you will repay each month and for how long. The creditor wants to know about three basic things when they grant a loan.

1. Your ability to repay.

The lenders want to know that the money you borrowed will be repaid on time. If you can't repay the loan, the lender will need collateral and the interest and/or the arrears.

2. How much money you make. 

Your income is an indication of your ability to repay the loan on time. Lenders also want to know if you have regular income sufficient to make additional payments along with the monthly loan payments.

3. How much money you owe. 

The amount of money you owe on your loan is also an indication of your financial situation. They want to know if you have any resources to repay them if you run into difficulty.

The most important thing to understand is that when financial institutions, lenders or the general public talk about credit repair they are essentially referring to the repairing and maintenance of your credit report. They require that the information be as accurate as possible. If it is not accurate or cannot be verified, it must be removed.

When applying for credit, each time you apply a new loan or other type of credit, a new inquiry will appear on your credit report. When you apply for a new credit or credit card and are not approved, a "hard inquiry" is placed on your credit. Lenders will see this as an indication that you may have previously applied for credit and were denied, and you are looking for another credit card. It can cause you to lose a lot of credit, because credit inquiries affect your credit score, on the same or other accounts. Applying for many new credit accounts will adversely affect your credit score.

Repairing your credit report involves requesting that older and/or smaller accounts be removed from your report. Because your credit score is strongly based upon your debt to available credit ration, removing the balances from some of your accounts will improve your debt to available credit ration, and your credit score will improve. You have to contact the credit bureau and credit card companies to get this done.

Cut up the cards and cut up the credit cards if you can't control your spending. If you must have a credit card, get one that reports to the credit reporting agencies as verified. You might consider getting an application credit card and using it responsibly, such as gas and office supplies. You may be able to get an account credit at a local retail store.

Keep all of your payments current. Open a savings account. Save for a rainy day. Keep your checking account in order. Banks are very slow to report your payments if you have overdraft protection. The charge that you make on your debit card will be reported to your bank and your checking account. Save more money.

Another way to improve your credit, if you can muster the will power to do so, is getting someone with good credit to cosign on a new line of credit. This will not only improve your credit score but their credit score will improve. Once you've got this new credit account, pay it on time for six months or so.

If you're willing to learn and correct errors, you can repair your credit. You might think it's impossible, but if you focus and apply a little effort, you can be on your way to better credit in no time.