CREDIT REPAIR

Nowadays, it is difficult to stay financially in the black—especially when we are young, just starting out in life with very little and trying to work our way up. It is also very easy to accumulate small debts that can come back to bite us if we do not pay close attention to them.

There are, of course, a couple of quick ways to eliminate debt—winning a massive lottery jackpot or inheriting a substantial sum of money. Unfortunately, those are wishful thoughts and not realistic solutions.

This is where credit scores come into play.

A credit score in the United States is a numerical representation of a person’s creditworthiness and the likelihood that he or she will repay debts. Lenders—such as banks, mortgage companies, and credit card issuers—use credit scores to assess the risk of lending money to consumers (Source: Wikipedia).

There are three major credit bureaus that lenders rely on for consumer credit information: Equifax, Experian, and TransUnion. These bureaus collect data from lenders who report their customers’ borrowing and repayment behavior. Based on this information, they build individual credit profiles and assign scores ranging from 300 (lowest) to 850 (perfect score).

The average American credit score typically falls between 600 and 720.

Often, it is the accumulation of small debts that causes damage to credit scores. Many people hold multiple store-specific or specialty credit cards and may forget to make a payment on one of them, which can immediately lower their score. This is known as payment performance.

Another factor affecting credit scores is the total amount of available credit. Each credit card has a borrowing limit, and when the combined credit limits are high relative to a person’s income, it can raise a red flag. For example, if someone has $40,000 in available credit but earns $60,000–$70,000 annually, lenders may view this as excessive borrowing potential.

Additionally, carrying balances on multiple cards—even if the balances are small—can negatively impact your score unless each card is paid off in full by the end of every billing cycle. Making only minimum payments signals financial strain and further reduces your score. Continuing to charge purchases while paying only the minimum compounds the problem even more.

This issue is commonly referred to as the debt-to-income ratio, which measures a person’s ability to repay debts based on their income.

To repair or improve your credit, consider paying off as many small or specialty credit accounts as possible—such as department store cards, gas cards, or internet service accounts—and then closing them. Keep only one or two major credit cards, such as Visa or Mastercard, and always make your payments on time—preferably more than the minimum, or in full whenever possible.

Your credit score plays a crucial role in major purchases, such as buying a home or a car. A higher score can save you thousands of dollars in interest over the life of a loan, as lenders reward strong credit with lower interest rates—and penalize weaker credit with higher ones.