Credit repair is all about improving an individual’s low credit score. To repair one’s score, you’ll need to understand how they are calculated and what banks see as favourable indicators or red flags when its comes to accessing applications for credit.
Credit scoring is used to determine how much risk there may be in lending to a credit applicant. Back in the 1920s, when American banks didn’t have the staff to assess people for loans, a credit scoring system based on mathematical equations was developed.
Various risk factors (marital status, children, length of employment, payment history, etc.) are entered into the system to determine a person’s score. Certain score cut-off points are established to determine good credit, where credit could be granted, and bad credit: where loan applications are rejected.
How Does Credit Repair Work?
Credit Repair works by manipulating factors that increase the score. A lot of companies, especially those that use the FICO Credit Scoring System, are tight lipped about how they calculate their credit score which can make the process of trying to improve credit scores a hit or miss affair. However, there is some basic methodology when it come to improving credit scores.
Here is an example:
The bank says that you need a score of three. You have been in the same home and at the same job for three years but have five credit cards with $100 owed on each one.
Calculation: Number of years in job (3) + number of years at current address (3) – number of credit cards (5) = Credit Score (1)
Using this basic example you would have bad credit. However, if you consolidated all of your credit cards into a one-card payment of $500, instead of the five-card payment of $100 each:
Calculation: Number of years in job (3) + number of years at current address (3) – number of credit cards (1) = Credit Score (4)
Your credit score would go up to 4, and you would instantly have good credit. This is how credit repair works.
Is Credit Repair that Easy?
Credit repair is not always easy, because the bank or credit reporting company won’t tell you about the details of their credit scoring equations. One of the most popular scoring systems, the FICO score, are really complicated and change all the time, so credit repair becomes more complicated.
A FICO score is based on various factors, such as:
- Payment history;
- Signs of responsibility and stability (lived in the same place for a long time, had the same job for a long time, home ownership);
- Number of recent credit applications;
- Utilisation of debt (current debt limits and how much is owed).
Credit Repair: Inaccurate Information
Credit scoring only works if the information on your credit history report is accurate. In fact, millions of people have inaccurate information on their records. The credit reporting agency does not check its information; it will rely on banks and other lending agencies to make sure the information is correct, and sometimes the process is even automated.
Maybe you actually paid that bill and the bank accidentally defaulted you due to confusion amongst branches? Maybe you were the victim of identify fraud? Credit repair can also refer to getting these mistakes removed from your credit history. You can get your file to check for errors from www.mycreditfile.com.au.
Credit Repair in Australia
Australian credit histories do not have payment history records. There’s no record of what debts you do have. Your credit history only reflects the number of debts that are more than 120 days behind, any legal actions taken by creditors, bankruptcies, personal insolvency agreements, and the number of credit applications that you have made.
Credit repair only works in Australia by getting errors removed and by making very few or no applications for finance. To remove errors from your credit history, you will need to contact the organisation who listed the problem in order to remove it.
Learn more about credit scores, credit history and other related issues from our insights page.