Debt Recovery: How to Repair Your Credit and Restore Your Freedom

Katie McBeth  | 

The world of debt recovery and credit repair is daunting. Rehab services will bombard you with phone calls, fliers in the mail, emails, and pop-up ads that will all tell you they can repair your credit (100% guaranteed) with a single phone call. Is it really that easy?

Chances are, no, it’s never that easy. But debt and credit repair doesn’t have to be difficult either. When you get down to the nitty-gritty of it, the hardest part about rebuilding your credit is simply making changes to your spending habits. It’s certainly not brain surgery or rocket science, but it does take patience, time, and determination to make your credit score better.

This article will help you understand when you need to call a professional, and when you can improve your credit by yourself. It will also help you pinpoint “quick fixes” and when you need to make bigger changes to your habits. Let this be your guide to starting down the road to a better credit score.

Breaking Down Your Credit Score

Here at Fiscal Tiger, we’ve covered a few different ways your credit score can be negatively affected. There is the classic way of not paying your debts on time, as well as bankruptcy, a high utilization ratio, and a bad history with previous loans and banks. There is also the potential for fraud or identity theft to 

High Existing Debtsnegatively affect your score. Unfortunately for consumers, there are a plethora of different ways your score can be impacted.

However, when it comes to improving your credit score, you’ll need to do some research into why your score is so low in the first place. This can help you determine if you need the help of a professional at all. First, you’ll need to order your credit report from each bureau. You get one free report a year, and it will help you discover where your credit score needs improvement. Here are some examples based on the factors that can affect your credit score:

Payment History

The most powerful indicator of your credit score is your payment history. Banks and loan offices want to know that you are capable of paying back your debts, and the credit bureaus have thus put a heavy emphasis on your payment history. According to FICO, 35 percent of your score is based on your repayment history, which is the single highest percentage of what makes up your score.

When it comes to repairing your credit, this also means that making on time payments can be the best and most effective way to improve your credit score. Although professional services can sometimes help you figure out a repayment plan that works with your budget, this form of credit rehab is not something that can be a “quick fix” and isn’t something that requires the help of a professional.

However, if you’ve done some digging and found that an old bill or account has gone to collections, you may want to consult a professional to help you determine what would be the best course of action. Sometimes paying off collections can hurt your credit score even more, as it will reset the date that the collections was made to the date it was paid. In general, the more recent the collections date, the more harmful it is to your score, according to MyFICO.

Professional needed: Not likely, unless you have an account in collections

The second most common indicator of your credit score is your existing debts. FICO states that 30 percent of your credit score is based on this number, and one of the most important factors if your credit utilization ratio: the current balance on your line of credit versus how much is available. The banks want to know that you are not “overextended” in your capacities to pay them back, so a high credit utilization ratio is often seen as a bad mark on your credit score.

If you fall under this category, you will most likely not need the help of a professional. Your best bet is to slowly pay off your existing debts until your utilization ratio is lower, but you can also request credit increases on your current cards if you’re willing to take that chance. The bureaus recommend a utilization ratio of 30 percent as a good figure to go by, so if you have $45,000 in available credit you will only want to be $13,500 in debt. Of course, if you just recently bought a home or some other large-scale loan, this can be rather difficult. However, over time (and with the addition of other factors that lead to your credit score) you can still make a positive impact on your overall credit score through regular payments to decrease what you owe.

However, it is also possible that your identity has been stolen and thieves have opened up multiple accounts under your name and maxed out these false accounts. In any case of identity theft, a professional credit repair specialist can come in handy.

Professional needed: Likely in cases of identity theft, unlikely otherwise

Credit History

Credit history is the third most important indicator of your credit score, and makes up about 15 percent of the math behind your score. In general, credit history is defined as the length of time you’ve had accounts open with banks and lenders. The longer the time, the better the history and the higher your score. Your credit score might be affected if you have a short history with the banks (people who have had no experience or are just turning 18 always start with a low credit score), or if you have recently closed an old account with a lender.

Closing an account can sometimes seem like a good idea: you’re removing the temptation of wracking up more debt, right? However, it erases all the history you’ve had with that lender, and the credit bureaus will consider this a bad move. Your score will definitely drop.

Do you need a professional to tell you this information? Certainly not, and you most likely won’t be able to use a professional credit repair specialist if this is what is hurting your credit. Once you close an account, you can’t open another one back up. A professional might be able to give you some advice, but they most likely won’t be able to help you out in this regard. Instead, keep your accounts open to help improve your score through your long-standing history and be mindful of any future accounts that you want to open.

Professional needed: Not likely

Inquiries and New Lines of Credit

Another indicator of your credit score number is score inquiries or new lines of credit. In the industry, there are two types of credit checks: hard inquiries (when a bank is checking your credit so they can open up a new line for you) and soft inquiries (when you’re just checking up on your score). Hard inquiries can be detrimental to your score if they happen multiple times in a year. There are a few exceptions to this, but in general more than two inquiries a year looks sketchy to the credit bureaus. Are you checking your score because you want to open up multiple lines of credit in a short amount of time? That’s not a healthy or financially smart move.

However, if you have not checked your credit or asked to open up a new line in a few years but are still having credit score problems, you might want to look into identity threat or fraud. Sometimes your social security number can be stolen, and the thieves will use it to try to open up new lines of credit using your high score. You might not even know it’s happened until you check up on your score and find it’s been hurt by too many hard credit inquiries and maxed out accounts! If this is the case, a professional credit repair company will be able to help identify the false accounts and dispute them with the credit bureaus.

Professional needed: Likely in cases of identity theft, unlikely for regular inquiries

Types of Current Debt

The final factor of your credit score is the types of debt you have with various lenders, and it makes up the last 10 percent of your score. Banks like to see that you have a variety of different types of loans and credit lines open, and the credit bureaus will reward you for having a more diverse portfolio.

If you have multiple lines of credit open, but no other loans, you might be hurting your credit score. However, if you’ve opened up installation loans (such as car or home mortgages), along with student loans and only a couple credit cards, the bureaus will see this as a responsible move. You obviously will be more inclined to pay off your valuable assets (property, car, business), and student loans show you are willing to invest in your future. Thus these types of loans are seen as favorable by the bureaus. Credit cards are more common, and can be used on everyday small expenses, so they are not considered to be as valuable as installation loans, but they still serve their purpose. It is important to know not to have too many of one type of loan and instead focus on diversifying your lending history.

Most likely you will not need a credit repair specialist to help you figure out if your portfolio is diverse or not. A simple detailed credit report can help you further understand where your credit score needs adjustments.

Professional needed: Not likely

Other Cases that Might Require Professional Help

Not all credit slip ups will happen because of the math behind the formula. Sometimes there are things that are more out of your control, and these cases certainly require the help of a professional (and reputable) credit repair company. Here is a list of examples for some of those cases:

The Credit Bureau Makes a Mistake

Credit reporting companies are not flawless. Sometimes they can make mistakes, duplicate reports, or miss reports all together. Credit reporting mistakes can happen to anyone, and it’s important to notify the credit bureaus the moment you notice a mistake on your report. MyFICO offers a list of the best ways to contact each credit bureau, at no cost to you.  

When these mistakes are made, credit rehabilitation specialists can help you understand your report and contact the credit bureaus, but you can also do it by yourself if you know how. The Federal Trade Commission (FTC) offers up a free step-by-step guide to help you get started when disputing inaccurate claims on your credit report.

In this case, if you don’t have the time to go over your report in detail and have the money to spend on a specialist, it might be worth your time. If you want to save some money, then try to do it by yourself. However, if you’re on a time crunch to get approved for a loan, the credit repair specialists might be the fastest option.

You’re Overwhelmed and Living Outside of Your Means

Credit repair specialists are able to help out in a plethora of circumstances, but where their help really makes a difference is in controlling and building positive credit habits.

Many people have caused their credit score to plummet due to years of bad habits, living outside of their means, and other common mistakes. Specialists can help identify those bad habits and set up a credit repair path that works best for you as an individual, while taking into consideration your income and needs.

If a credit rehab specialist is promising you a better credit score in 30 days, 100 percent guaranteed, and with a fast turn around, you’re most likely dealing with a scammer. True specialists focus in on your personal needs, and create long lasting plans to help you become a better spender and lender.

Credit Habits that Last

Repairing your credit using these steps will certainly help you improve your credit score. However, the most important take away shouldn’t be the method, but the habits that you will be creating. It is important to always be aware of your credit score and what you are doing currently to make it better. Over time, those efforts to improve your spending will become habit, and you’ll be a smarter shopper and a more successful borrower because of it.

Need more help understanding credit scores? Visit our credit score learning center for more information.

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This post was updated February 28, 2019. It was originally published July 18, 2017.