Unless you’re paying for everything with cash, including a home and car, you need to make sure that you have the best credit score you can. Even if you think you’ll never use credit, you’ll still need a card for things like airline or car reservations.
If you have a new business, you may want to use credit cards or establish credit accounts with vendors.
For most Americans, it’s not a matter of whether they’ll be using credit. Most people do. Instead, it’s a matter of what kind of credit you can get. For some, you need massive amounts of credit. For others, it’s the best rates, no annual fee, and so on.
We live in a nation riddled with debt and mired in credit issues. According to Business Insider, nearly half of all Americans Carry credit card debt. The average balance is $5,700. It’s a vicious cycle in which people use credit when they don’t have enough cash. But they max out so many cards that, eventually, they can’t even make the minimums on their credit accounts.
Take a Look at Where You Stand Now
You can’t fix something until you know what needs to be repaired.
If your credit’s been declined, it’s probably sparked your desire to clean up the mess and be in good standing. If you were recently denied credit, you are entitled to a free copy of your credit report. The information for how to get a copy should is, by law, included as a part of your denial letter.
Or maybe you’re considering a big-ticket purchase (like a new car or mortgage), and you want to make sure you’re where you need to be.
Once you know there’s a problem, sticking your head in the sand and ignoring it will just makes it worse.
The first thing you want to do is order your credit score and reports. This will give you a good idea of what you need to do to put yourself in the “good risk” category.
Every year, you’re entitled to a free credit report from each of the three credit bureaus, TransUnion, Equifax and Experian. You can receive a copy of your credit reports at www.annualcreditreports.com. You can also sign up for ongoing access and monthly notifications, which can save you money in the long run.
You can also get your scores, numerical indications of your credit worthiness, from each credit bureau. The credit scores you receive will give you an idea of where your credit stands. You will want to run your FICO score as well, though. FICO is different and used by most lenders to determine whether you’re a viable loan candidate.
After you see what you’re up against, it’s time to start correcting mistakes and making repairs to your credit. There are a few steps you can take. Some you may not need and others you will. Everyone is different.
Correct Any Errors on Your Credit Report
First, go over your credit reports from all three bureaus with a fine-toothed comb. You want to make sure there are no mistakes on your credit file.
Some of the most common errors you might find include:
- Someone else’s name is on your credit report. It might be a different spelling or a different middle, first or last name. This could be a complete stranger or someone in your family, like John Doe II and John Doe III.
- Someone else has been using your social security number. The things they’ve used it for will likely show up on your report.
- There’s an account that should be on the list but isn’t. This can happen if a clerk entered the number wrong, for example.
- Your ex spouse’s information is being mixed in with yours for a new account they opened in their own name.
- It’s past the date for an old, negative item to disappear from your account, such as a bankruptcy.
- Payment status is incorrect. For instance, you paid off a debt months ago and it’s still being reported with a balance. You can get them to update that information to reflect its new status.
All three credit bureaus have both online and offline (snail mail) reporting options. You send in the corrections and give them time to investigate it and make corrections. The credit bureaus will typically have 30 days to review your case and report their findings to you.
It won’t happen overnight. It’s important that you start cleaning up your credit report as soon as you know it’s needed.
Repairing Damage That’s Been Done
Before you start calling creditors and closing all your accounts, understand this. Having the cards isn’t what ruins your credit; it’s how you use them.
In fact, if you closing your accounts, you might actually hurt your credit score. You could be eliminating the credit cards with longevity, available credit, and a good payment history.
As you pay off those cards, your balance-to-limit ratio improves. This raises your credit score. The more available, unused credit you have, the better it looks for you.
Whenever you can, get your creditors to raise your credit limit, too. This raises the amount available to you and looks good to creditors. Sometimes this will be automatic, and sometimes you have to ask for it.
Some things will just take time to drop from your credit report. For example, if you got behind on payments, it can take seven years to drop off. Records such as judgements, tax liens, or bankruptcies can take from seven to 15 years to stop showing.
This can be grueling as you wait all that time for your credit to improve. But if you clean up the rest of your credit, lenders ma work with you on the other items. You might not get the best rate, but often it won’t be a firm denial, either.
The very best thing you can do is to pay off your debt and stop using your credit cards. You can reduce the amount owed in one of two ways.
Most lenders recommend paying off the cards with highest interest first. While you do, only make the minimum payments on the others until you are able to pay the balance off.
Some people need motivation and enthusiasm when they’re going through this process. They might want to go a different route, one that has them paying off the card that has the lowest balance first. If you’d like to see an example of this, check out the David Ramsey snowball method.
After paying off the the smallest debt, you use the monthly payments you were making to pay off the next one in line.
Keeping Track of How You Are Doing Along the Way
When you have your credit scores and reports in front of you, they will tell you what you’re doing wrong – and what you’re doing right! This can be a big help along the road to your credit recovery.
For example, it might say:
- You’ve made all your payments on time – this is something you’re doing right!
- You aren’t applying for new credit all the time – another benefit.
- You have many types of accounts, which enables lenders to see how you manage your debt overall.
- You have a mortgage – and are paying it on time – very responsible of you.
But then it could have some negative items on your report, such as:
- You’ve spent 90% of your available credit, which makes it look like you’re living off your credit cards. Ideally, you will want your credit card balance to be less than 30% of your total credit available.
- You’ve spent over half of the credit lenders have given you – you should have some cards paid off in full.
- Your credit limits are too low. When lenders give you a high credit limit, it means you can manage larger available lines of credit.
It’s wise to periodically run your credit report. Better yet, sign up for the alerts system that warns you of any changes. That way you’re always on the ball about where your credit stands. There are plenty of companies out there that will offer to help clean up your credit for a fee. If you don’t have the time or desire to do it yourself, this is an option.
However, you can also clean up your own for free.
Maintaining a Quality Credit History
Pay your bills on time, every time. Creditors might waive a late fee and not report you once if you call and explain a situation. But don’t expect them to do that for you time and time again.
Never let anything go into collections. That’s the worst – when creditors have to chase you down to try to get money from you. Instead, call and negotiate a payoff amount or new payment date. You’d be surprised how willing lenders might be to work with you.
Try to pay your balances in full each month. You shouldn’t be charging things that you are unable to pay for with cash. If it makes things easier, take the cash that you have paid for the purchase and transfer it to a savings account until it’s time to pay the credit card bill. You can pay a little interest to yourself rather than the credit card company.
Go easy on the new lines of credit. As your credit score and report clean up, you’ll start getting plenty of offers in the mail. Don’t open new ones unless it’s needed and necessary.
Every time you make an inquiry for a new line of credit, it shows up on your credit score. Having 1-2 inquiries is okay, but more than that and it starts to affect your credit score.
Whenever you do apply for new credit, shop smart. If your score and history are clean and rising, there’s no need for you to accept an offer with a high interest rate or large, annual fee.
Are Credit Counselors or Debt Consolidation Good Options?
In some cases, they are wise options – but not for everybody. If you can raise your credit score on your own without a debt counselor or consolidation loan, then it’s better to do it that way.
But some people simply aren’t good at managing money or their credit. Having a professional guide you along the way can be a real blessing and take away some stress.
A credit counselor is someone who helps you make a budget and debt plan. They’ll educate you about your finances and assist you in knowing what is the best course of action. The National Foundation for Credit Counseling is one option. They help using a low cost scale.
A credit counselor will need to see pay stubs, statements, a list of assets, and a list of all your monthly expenses. They also need to know about any calls or letters from collection agencies. Those are the most urgent and need to be dealt with right away.
You need to be aware, before dealing with a credit counseling service, that there are a ton of scams out there. You want to be working with a non-profit agency. The others could cause you more harm than good when it comes to your credit score.
Debt consolidation is when you take all your debt and pay it off with a new loan. This merges it into one account, typically lowering your monthly payment. This doesn’t immediately boost your credit score, though.
In fact, it can hurt it at first. Yes, you’ll lower your monthly payment, so if you can’t make your minimums, this might be an option. But it puts a sudden, hard inquiry on your credit report. Plus, you now have a big installment loan on your credit report, too.
Cleaning up your credit score when you’re in a rush can be frustrating and disheartening. You’ll sometimes wish you could start over with a clean slate. But that’s not how it works.
The good news is, your hard work will pay off! Once you have your money under control, you have the opportunity to enjoy pristine credit for years to come. It’s very freeing once you’re out from under the thumb of the credit and debt monster.