Understanding the Foundation of Credit for Credit Repair


Credit repair is something that people go through every day all over the country. While some people struggle with bad credit, it is not always the result of mismanagement. With today?s economy, many people are currently going through the process of credit repair. With no job, payment on bills falling behind, credit being overextended, and other situations, ultimately, the credit score suffers. However, before anyone can dive into the steps needed for cleaning up problems on a credit report, he or she needs to understand what types of things are looked at by creditors.

When a person goes to purchase anything on credit, a home, car, motorcycle, boat, or signs up for credit cards, the first thing that will happen is the creditor will pull a current credit report from all three reporting credit bureaus, Equifax, Experian, and TransUnion. The information provided on the report will show the creditor the person?s history of paying bills on time, the number and type of unsecured credit, whether that person is overextended financially, number of inquiries for additional credit, and much more. In other words, the credit report paints a big picture of how well or poorly that person handles credit.

To go through the credit repair process, people also need to understand that the score is not just an arbitrary number, but a number that has been carefully calculated using specific criteria. Based on Fair Isaac, the developers of the scoring system for credit called it FICO. The goal of credit repair is to raise the FICO score in that the higher the number the better. Every credit report score is based on a set of criteria that includes five areas:

1. Payment History ? Interestingly, 35% of a person?s overall credit score is based on payment history. Therefore, while it might not seem like a big deal to be late one or two times on a bill, it actually matters a lot. In fact, when going through the credit repair process, this will be the primary focus. Being consistently late on paying bills shows creditors that the person is habitually late, making him or her risky.

2. Outstanding Balances ? Next, outstanding balances account for 30% of a person?s overall credit score. Again, as a part of going through credit repair, the balances will also require serious attention. If a person is close to being at the top of his or her credit limit, it is imperative that balances be paid down. Even if a credit card were used for a medical emergency, the balance needs to be lowered quickly in that creditors will not care the reason.

3. Length of Credit ? Another criterion for being offered credit with a great interest rate has to do with the length of time credit has been established. Being 15% of the credit score, typically a person that has had good credit for a long time would be viewed as a better risk over someone that has only recently secured credit.

4. Brand New Credit ? When a person applies for new credit, his or her credit score would be lower. The most important thing here is that applying for several new credit accounts in a short amount of time will have a negative impact on the overall credit score and look suspicious to creditors.

5. Credit Type ? Creditors will consider a person with a variety of credit types a much better risk than a person that has too much credit. Again, as part of credit repair, a person that has too much credit would need to pay off the higher interest loans and cards, which will help.

The FICO score is also broken down by numbers, which is also something important to know. Understanding where a person stands will show him or her, the level of effort for credit repair needed. The following is the official breakdown of numbers on which the FICO score is comprised:

? 700 and Above ? Getting credit with scores in this range is never a problem, interest rates offered would be the best available, and employers would be impressed.

? 680 to 699 ? This score is considered ?good? but also not a problem to creditors.

? 620 to 679 ? While these numbers are still good, the higher a person is in this range the better but most creditors would still be fine with lending money.

? 580 to 619 ? This is considered a medium range, which means credit would still be available but at a higher interest rate.

? 500 to 580 ? This is on the lower end, meaning creditors would see these numbers as being somewhat risky.

? 499 and Under ? People that have a credit score in this range have bad credit. Therefore, securing a loan, getting credit cards, being hired, and paying low interest rates would definitely be affected in a negative way.