One of the first things banks and lenders look at when reviewing financing applications is your credit score. Whether you’re trying to fund a new business or buy your first home, checking your credit report is an integral first step.
Negative items on your credit report are what negatively impact your credit score. Things like late and missed payments, hard inquiries, or having debt sent to collections can stay on your report for years. Fortunately, there are several things you can do to make a positive change.
Here are five steps you can take to clean up your credit report.
One of the most impactful ways to improve your credit score is to remove inquiries from your credit report through a formal dispute. During the dispute process, you can request the removal of items that are past the statute of limitations or have incorrect information.
To start the dispute process, you must write a letter to the creditor— a snail mail letter, not an email— asking for data validation. It’s best to use registered mail for date and delivery tracking. The creditor has 30 days to respond, confirming the information. If they don’t respond, you can send a subsequent letter demanding removal.
If you have several negative items, you can engage the services of a credit repair agency to handle the process. Alternatively, you can get some credit removal software to aid the letter generation and communication tracking.
If you miss payments or fail to make minimum payments by the due date, it will negatively impact your credit score. The easiest way to avoid making this mistake in the future is to set up automated payments, ensuring that the minimum payment is always completed on time.
Consider setting up automatic bill payments in alignment with payday. This automated payment process will ensure your bills are getting paid before the money goes elsewhere.
If you have a significant amount of debt or struggle with financial habits, the next step is to schedule a discussion with a financial advisor. Ideally, you’ll work with a financial advisor who specializes in debt management.
A financial advisor will help you put a plan in place to correct your credit report while budgeting and planning for the future. Taking a proactive approach to the future is the best way to protect yourself from repeating the same financial mistakes.
After you’ve put a plan in place to dispute negative items and make minimum payments on time, the next step is to pay down your existing debts. The less debt you carry, the better your credit score will become.
There are several debt payment strategies. Some of the most popular approaches include:
- The Debt Snowball – start by paying off the smallest, most attainable debts, then use the extra money to attack the more significant debts.
- The Debt Avalanche – start by paying down the most significant debts to attack higher interest rates.
- The Debt Cascade – write down your current minimum payments and make them. As your minimum payments go down, continue to pay the original amount.
While these strategies are effective self-led debt payment plans, it’s always best to discuss your options with a financial advisor.
When a bank or lending agency submits a credit report request, it’s known as a hard inquiry. This pull is flagged on your credit report and has a negative impact on your credit score. If you’re trying to improve your credit score, avoid seeking financing information that requires a credit pull. Keep in mind that looking at your own credit report is a soft pull and doesn’t impact your score.
Use these actionable tasks to start cleaning your credit report. Take a long-term approach and put strategies in place for healthy financial management.