One of the most important yet often overlooked financial strategies is maintaining clean credit. Your credit report is foundational to the health of your finances.
The information on your credit report is the basis for your credit score. Even a few points of difference could save you thousands on a loan, credit card, or insurance policy.
Although it might seem intimidating or too involved, being able to clean up your credit is a great skill to have. And sometimes it can literally pay off, resulting in greater financial freedom for you and your family.
How to Clean Up Your Credit Report
In this article, we’ll run through the most critical steps you can take to clean up your credit report to improve your credit scores over time. We’ll also share some extra tips on general credit maintenance.
This is what the process looks like in a nutshell:
- Request a free copy of your credit reports.
- Review your credit reports for mistaken items.
- Dispute credit report errors.
- Lower your credit utilization.
- Pay off debts.
Before we look at each of these steps in more detail, first let’s get clear on how exactly your credit score is calculated.
How Your Credit Score is Calculated
Understanding how your credit scores are calculated is the first step to cleaning up your credit history and improving it. Most creditors use the FICO credit scoring model to determine your credit score which is based on several factors.
Creditors report your financial information to the three major credit bureaus, Equifax, Experian, and TransUnion. However, each credit bureau has its own relationship with creditors, so your credit score may vary among them.
Credit utilization is the amount of available credit that you actually use. This is presented as a percentage, and the lower your credit utilization is, the better your credit will be.
According to FICO, your utilization accounts for 30% of your credit score. With VantageScore 3.0, it accounts for 20%.
Another major factor in your credit score is your payment history. This illustrates to creditors how consistent you’ve been with making payments, bills and other financial obligations on time. FICO considers payment history to account for 35% of your credit score. For VantageScore your payment history counts for 40% of its scoring model.
Length of Credit History
The longer your credit history is, the better. This is why it’s typically not a good idea to close a longstanding account even if it is unused. Those with thin credit history can benefit from credit building cards and services.
Mix of Credit Types
The types of credit you have will also factor in to your overall credit score. Lenders prefer to see that a consumer can manage several types of debt. This is why having a mix of credit accounts, such as a mortgage, loan or credit card, can raise your FICO score.
Every time you make an application for a new source of credit, a hard inquiry is made on your credit reports. This often takes a few points off your credit score, but this can be built up again within a few months of good credit use.
In the charts below, you can see there is plenty of potential for improving your credit reports by removing negative information.
1. Request Your Free Credit Report
The first step to cleaning up your credit is to request a free credit report. The Fair Credit Reporting Act (FCRA) allows you to get a free credit report from each of the three major credit bureaus every 12 months. This means you could request your credit report up to three times a year.
Regularly checking all three of your credit reports is key to knowing which items are potentially damaging your credit scores. It can also help you to notice any potential instances of identity theft, which could be extremely damaging to your credit reports and scores.
Be aware that you won’t see your credit score on your credit report. Instead, it will contain your identifying information, as well as a history of your financial movements as reported by the respective credit bureau.
2. Review Your Credit Report
Cleaning up your credit starts with reviewing each section and looking for any potential red flags, including:
- Inaccurate personal information, such as your name or social security number
- Accounts that don’t actually belong to you
- Unauthorized credit inquiries
- Inaccurate account details, such as amounts owed or credit limits
- Missing information, such as closed accounts being listed as open
- Outdated, negative information still listed after the seven- or ten-year limit
3. Dispute Credit Report Errors
If you do encounter any mistaken items on your credit report, it’s worth initiating a dispute as soon as possible. You can file a dispute directly with the credit bureau that is responsible for the error. While you can dispute online, it’s better to send it by snail mail.
If the dispute is resolved in your favor, the credit bureau is legally obliged to report the issue to the other two bureaus. However, to be sure it can be worthwhile sending notice of the resolved dispute to the other two bureaus anyway.
If dispute is denied, you can take further action by filing a written statement that can be included in your credit report for future creditors to notice. Or you can submit a complaint with the CFPB.
If you have numerous negative items, you may want to only dispute a few items at a time. If you choose to do this, start with the most damaging items first.
How Does a Credit Dispute Work?
Once you decide which items to include in your dispute letter, you can gather any evidence you wish to use to support your case. However, this step is optional. You don’t need to include it in your dispute as the three credit bureaus bear the burden of proof.
It’s then the job of the credit bureau to verify each disputed item with the relevant creditor. If they can’t verify it, they must remove it from your credit report. However, it’s wise to have your paperwork on hand to support your case, just in the event that the creditor provides wrong information.
4. Lower Your Credit Utilization Ratio
As mentioned already, credit utilization is the amount of available credit that you actually use. This is expressed as a percentage. Ideally, your credit utilization ratio should be 30% or lower. For example, if your total available credit amounts to $5,000, you should try to keep your credit debts to $1,500 or less.
You can determine your current ratio by dividing all of your current credit debt with your total credit limit (across all cards).
If you’re using too much of your available credit it indicates to creditors that you may be relying heavily on credit cards for daily living expenses. This makes you a higher credit risk and will lower your credit scores.
You can work to clean up your credit and lower your debt-to-credit ratio by paying off large balances and keeping future debts small.
5. Pay Off Debts
In addition to filing any disputes on your credit report, addressing lingering credit card debt is also crucial to cleaning up your credit.
There is more than one way to work out paying off your debts, however. Let’s take a look at the most common methods you can use.
One option you have is to transfer your balance to a new card with an introductory interest-free period. This allows you to pay off your debt faster and cheaper than keeping it on a high interest card.
There are credit cards out there with long balance transfer intro periods, so shop around and see what’s available to you. Most balance transfers must be completed within a few months of opening your account. There may also be an introductory balance transfer fee, but these can be low if you find a good deal.
Taking on more debt may not be a good idea depending on your situation. However, it could potentially help in the long term to consolidate your debt with a personal loan. A personal loan will usually offer more accepting credit requirements than a good balance transfer credit card. They are also helpful for managing large amounts of debt.
Using personal loans, you can consolidate your debts for a more affordable monthly payment. In addition, making on-time payments will help you build a good credit score over time.
Review Bills & Expenses
One potential way to better manage your debt is to look over your budget and consider lowering any bills or outgoing expenses. Although this might seem obvious, often there are unnecessary expenses that we can be unaware of.
Regularly monitoring your budget, and tracking all purchases can help keep those unnecessary expenses to a minimum. This can free up funds to help pay off your debts quicker.
More Credit Cleaning Tips
Debt that has been charged off means that the creditor has declared it unlikely that you’ll ever repay the debt. Charge offs can eventually be sold to a collection agency which then begins the work of seeking payment from you. When it comes to your credit scores, charged off debt has a greater negative impact than a late payment.
Removing a charge off from your credit reports will take work, but it is possible. You will need to contact the creditor and ask if they are willing to settle. This can be done by phone or by letter. However, the most effective way to have proof of the settlement is to get everything in writing.
Then you can make the payment in certified funds, so you have proof the debt is paid. Once that’s done you can file a dispute with the credit reporting agency. You can use your proof of payment to support having the disputed charge-off removed.
Collection accounts are usually the most complicated issue on anyone’s credit report. Unfortunately, collection accounts are typically sold to debt collection agencies, sometimes multiple times.
- If the debt is past the reporting limit (generally more than 7 years old) then the collection agency cannot list it, and you can dispute the information to have it removed.
- If the collection agency has reported the wrong date, the wrong amount, or other erroneous information, you can dispute that as well and have the negative listing deleted.
- You have 30 days to request validation from the time the creditor first contacts you. In this time, they cannot perform any collection activities and they cannot add the debt to your credit report while the investigation is ongoing.
For older debts, collection agencies are often unable to provide accurate information that proves they own the outstanding debt and that you owe it. In such cases, it pays to dispute any inaccurate information.
If you’ve been 30 days or more past due on an account, you may find a late payment listed on your credit report. While having delinquent accounts can be damaging to your credit scores, they can sometimes be easy to fix.
Start with the late payments that are the most past-due, i.e., the 90-day and 120-day debts. These are the most damaging accounts to your credit. They are also the accounts most likely to be sent to collections or charged off.
Often, creditors are willing to work with a good customer who is rarely late with payments. Otherwise, you will have to send your dispute in writing to the three major credit reporting agencies and your creditor to get the inaccurate information updated.
Consider Working with Professionals
You can also clean up your credit report by working with a reputable credit repair company like Sky Blue Credit Repair. If you feel overwhelmed or unsure about how the process works, credit repair services can file disputes on your behalf.
What to Do if a Credit Dispute Fails
If your request for removal of a negative item is denied, there are a few more methods to try. First, you can always wait for the negative item to drop off naturally.
Most items will stay on your credit report for up to seven years. However, they cause less damage to your credit scores as time goes on. If you’re close to that drop-off mark, it may be worth just exercising a little patience.
If you’ve tried to clean up your credit on your own to no avail, consider hiring a professional. The fee for a professional credit repair service could be worth it if you’re suffering from high interest rates or lack of credit altogether because of your bad credit.
What’s the fastest way to improve your credit scores?
Cleaning up your credit takes some time. But once you’ve initiated the dispute process on your inaccurate negative items, there are other things you can do to help repair your credit quickly:
- Reduce or eliminate your revolving debt, particularly from high-interest credit cards.
- Consider a debt consolidation loan or balance transfer credit card. Paying down credit card balances as quickly as possible will help you lower credit utilization ratio.
- Ask for a credit limit increase. This can also help to lower your credit utilization.
- Consider getting a secured credit card. Secured credit cards require a security deposit which will also act as your credit limit. These credit cards allow you to build credit when no one else will give you a credit card. You can often upgrade to a better credit card once you’ve proven yourself to the credit card issuer.