Credit repair is about improving an individual’s “bad credit”. To understand how credit repair works, you need to understand what a bank uses to determine that you have bad credit: credit scoring.
In America and most other developed nations, a system called ‘credit scoring’ is use to determine someone’s credit-worthiness or how much risk there may be in lending to a credit applicant. In the 1920s, when American banks did not have enough experienced staff to assess people for loans, a credit scoring system based on mathematical equations was developed to evaluate loan applications.
Various risk factors (marital status, children, length of employment, payment history, etc.) are entered into credit scoring equations to determine a person’s score. Certain score cut-off points are established to determine good credit, where credit could be granted, and and bad credit, where loan applications were rejected.
Basic Example of a Credit Scoring Equation with Three Factors
(number of years in job) + (number of years at current address) – (number of credit cards) = Credit Score
If you have a credit score of more than 3, then you have good credit; if you you have 3 or less, then you have bad credit.
How Does Credit Repair Work?
Credit Repair works by manipulating factors to increase the score. Take the basic example as shown above. 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.
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:
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 so easy, because the bank or credit reporting company won’t tell you about the details of their credit scoring equations. Also, since the 1920s, these systems have become more accurate at predicting if people would default but have also gotten a lot more detailed. One of the most popular scoring systems is called a FICO score, named after the people who invented it in 1956. FICO (or similar) scores 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 histories;
- 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 Basics
- The fewer debts, the better. Debt consolidation can help, but only if you close your other debts.
- Don’t apply for a lot of loans; it makes you look desperate.
- Don’t move or change jobs all the time.
- Regular repayments are really, really important! Set them up on direct debit.
Credit Repair: Inaccurate Information
Credit scoring only works if the information on your credit history report is accurate. Maybe the information on your credit history report is wrong! In fact, millions of people have inaccurate information on their records. The credit reporting agency does not check its information. It relies 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 need to contact the organisation who listed the problem and get them to remove it. Veda Advantage (mycreditfile) can not remove mistakes on its own.