Charles H. Miller
People with bad credit — i.e. below 619 on the FICO score — find themselves with many doors closed. More often than not they get less-than-desirable rates when taking a loan, and some of the fanciest rewards credit cards are out of their reach.
If you’re in that group, you will have to work extra hard in order to rebuild your credit. Yes, you will have to make many changes in your life, but this is something you simply gotta do.
We want to help, and have prepared the following tips to get you going. Here’s what we’ve got…
1. Check Your Credit Report
First you need to know how are you standing and build from there. You may have a credit card that lets you check your credit report from time to time — use it. If not, you can use AnnualCreditReport.com, which is the official site run by the three credit bureaus. A free credit check is available once per year.
Alternatively, you may order reports directly from each of the three bureaus: Equifax, Experian, and TransUnion. What you’re looking for are errors and fraudulent accounts which you may dispute.
If you are concerned about fraudulent accounts and identity theft, you can place a freeze on your credit to avoid further problems. You’ll have to check with each bureau cause each one of them has its own procedures.
2. Catch Up on Your Payments
Payment history has a big impact on your credit score; so if you are behind on your payments, you’ll have to tackle that situation by trying to bring all of your accounts up to date.
If that’s not possible at the moment, see if you can reprogram the entire or a part of the debt. Contacting your creditors could help to come up with a new payment plan you can handle. Presuming you clearly explain your situation, they may be able to help. After all, they want their money back (with interest).
3. Start Paying Your Bills on Time
Paying your bills on time is important for everyone who wants a good credit score. If you’ve been missing on this, it’s time to change that. Use online banking to automate these payments if you have to, but make sure your utility bills are paid on time every single month. Your bank will take a notice of it, have no doubts about it. And the same goes for credit bureaus.
4. Don’t Close Credit Card Accounts
If it is possible, avoid closing credit card accounts. You may not have the choice if you are very far behind in your payments, though. At that time, the newly created payment plan — created in partnership with your creditors — may require that you close some or all credit card accounts. See if you can leave some of them open only to have a substantial credit history on your side. Do not use that other card to spend more!
5. Pay Down Debt
What you want to do is decrease your credit utilization, which shows how much debt you have related to the available credit. For instance, if you have a total credit availability of $10,000, and you are using $6,500 of it, your credit utilization is 65%.
What you want — and what credit bureaus are looking for — is low credit utilization of around 30%. This tells them that you can manage your debt.
To that end, you should pay down your debt. This entails making cuts all around the place, and may require postponing some purchase, changing your lifestyle — but it’s all worth the effort.
6. Put Your Spending Under Control
Related to the previous point, you should put your spending under control. Create a budget, listing all of your expenses for the month. You could put these in several categories — like essential and nonessential expenditure — with sub-categories such as utilities, transportation, fun, mortgage/rent, and so on. At the end of this exercise, you should realize where you can find room for savings.
Another tool you could use is a secured credit card. It doesn’t come with any rewards, and instead requires you to pay down a deposit that will also be the limit of your spending. This sort of card involves reporting to credit bureaus, with your regular payments directly making a dent in your credit score.
