How can I rebuild my credit score?

When you’re applying for a mortgage you want to secure the lowest interest rate you can — the difference of just half a percentage point can mean tens of thousands of dollars extra in interest over the life of your loan.

Therefore it’s important to present yourself in the best possible light to lenders. They need to feel assured that:

• your personal financial management is good, and
• your risk of default on your home loan is low.

To assess your application, they will look closely at your credit score. Every mark counts against you and could lead to you being offered a higher interest rate (to offset their risk of lending to you), or having your loan application rejected.

Both would be unfortunate scenarios. Every application adds an enquiry to your credit score, so a rejection would further damage your credit report and potentially make other lenders wary of lending to you.

As a result, it’s important to do what you can to repair your credit before applying for a mortgage. There are two ways of doing this: clean up your credit file yourself, or engage a credit repair company.

How can I fix my credit myself?

The best way of doing this is to get on top of your finances. Here are some general tips:

• Set a budget and stick to it.
• Make all your payments on time.
• Pay off your credit cards each month.
• Reduce your use of credit cards (credit utilisation should be low relative to your credit card limit, so lower your usage not your limit).
• Keep credit cards open to demonstrate low utilisation and a credit history.
• Avoid applying for new lines of credit.
• Get a copy of your credit report and check it for any errors that you can dispute.

To access a standard home loan with a good rate, you will usually need to pay all defaults so they are no longer on your credit file, and have made all debt repayments for at least six months.

It’s a good idea to stay up-to-date with your credit report and clean it up, if necessary, before you apply for a home loan so you can get the best rate possible.

What leads to bad credit?

While black marks on your credit report generally stem from defaulting on payments, other causes can include:

• Identity theft;
• Disagreements with your lender or credit provider;
• Mistakes on the part of your lender.

What does a credit repair company do?

Credit repair companies seek to remove contentious or unfair black marks from your credit report to improve your credit report and help you access more home loan products.

How can credit repair services help?

There are several processes that creditors must follow when recording a black mark on your credit report. However, some of them fail to follow these processes when listing a default on your report.

A credit repair service can help you find these arguable black marks and try to get them removed from your report. You’ll benefit from this in several ways:

• Lenders may offer you lower interest rates if you have a clean credit report.
• You increase your chances of getting your loan application approved.
• You gain access to more credit and home loan products.
• Lenders may reduce their fees.
• Your credit report becomes a more accurate representation of your credit history.

How does credit repair work?

Your credit repair company will obtain your credit report, usually from a national credit-reporting agency, such as Experian, Veda or D&B. This allows them access to the listings on your credit report to identify the black marks they need to investigate.

The company will then work with you to find out if any of these black marks were processed incorrectly. A creditor must do all of the following when creating a black mark on your credit report:

Send a final bill;

Wait for at least 30 days after sending the final bill before sending a formal demand letter. This must contain accurate information on:

• the amount you owe,
• the time you have to repay,
• the repayment methods available,
• that your creditor intends to create a default on your credit report if you don’t meet your obligations;

Wait a further 30 days after sending the formal demand letter before creating a black mark on your credit report.

Your credit repair company will examine the documents you received from your creditor to ensure they followed the correct procedures. If they haven’t, your company will contact the creditor to inform them of the breach and attempt to get the black mark removed.

You can undertake this process and fix your credit yourself. However, you may find your chances of success decrease if the creditor contests your request to have the default removed.

What can credit repairers remove from my credit report?

It depends on your situation, but a credit repair company can remove any black marks for which the creditor did not follow the proper processes. This means you may be able to remove any or all of the following:

• Court listings and judgements;
• Defaults;
• Overdue payments;
• Crossed files;
• Clear outs.

There are several other things a credit repair company could help with, so it’s best to speak to them directly. Each black mark that gets removed improves your credit rating.

Repair credit or refinance?

Some people choose to refinance their existing home loans rather than repair their credit reports. This will only benefit you if you have built a large amount of equity in your home. In such cases, lenders may overlook credit issues and still offer low rates.

If you don’t have equity, credit repair improves your chances of getting a good rate.

What to do next

While credit repair services will cost you money in the short term, they also offer access to long-term savings on your home loan. Before you get started, you should:

• Read about refinancing as a possible alternative to credit repair;
• Find out if you could save money through refinancing;
• Live chat with one of our home loan brokers.

With Alexi Neocleous

The information in this article is general in nature. Please seek advice from a licensed professional when making financial decisions.