Inefficient financial management, overspending, and bad habits can contribute to below par credit. And a poor credit score will make it difficult for you to get loans or new credit cards. Even if your applications get approved, you will still be considered to be in a high-risk category, which means that your interest rates would be soaring. This can cost you a lot of money.
The good news is that if you follow a plan and have patience, you can come out of the situation. Here are some for rebuilding credit that should help you get started.
Repair your Credit
You are entitled to a credit report once a year from each of the three credit reporting Bureaus-Equifax, Experian, and TransUnion. You can visit AnnualCreditReport.com for your free credit reports or order reports directly from each of the three bureaus.
The information on your credit reports directly impacts your credit score. Check each of your credit reports to find out what you need to improve. Do you have a lot of late payments? Is your credit utilization too high? Are there any unresolved claims?
You might even have inaccuracies on your credit reports that are negatively affecting your credit score.
You have a legal right to dispute errors in your credit reports. The credit reporting agencies are bound to investigate and clear them if your objection is valid.
Tackle Delinquent Accounts
It pays to work on settling debts so that they don’t show up on your credit reports as currently delinquent. If you can’t keep up with the payments, negotiate a deal with your creditors. Try to work out a more manageable payment plan instead of an outright default. You may also be able to settle a debt for less than its total.
Get a Secured Credit Card or a Credit Builder Loan
For rebuilding credit, you must have debt that you can pay off responsibly. But obtaining credit in favorable terms will not be easy if you don’t have a good credit score. In such a scenario, there are two options that you can use.
Secured Credit Card
A secured credit card requires you to keep money in a linked savings account as collateral. Since the money is already there and the credit limit of the card will usually be the amount of the money deposited, it is easier to get approved for a secured credit card. Your payments will be reported to the bureaus every month, so you can build a payment history of paying regularly and on time.
Credit Builder Loan
In case of a credit builder loan, the amount you borrow is held in a bank account while you make monthly payments. Once your balance is paid in full, you receive the funds. A credit builder loan will also help you to rebuild credit if you make payments on time.
Never miss any Payments by more than 30 days
When it comes to loans and credit cards, make at least the minimum payments on time every month. If you are late by more than 30 days, the creditor can report it to the credit bureaus.
Keep your Credit Utilization Ratio in check
The credit card amount that you owe divided by your credit card limit is your credit utilization ratio. If you are carrying high balances on your credit card, your credit score would be affected negatively. Ideally, get your credit utilization below 10% to rebuild credit. If you can’t at least don’t let it go over 30%.
Don’t apply for too many new lines of credit within a short period
Don’t apply for too much new credit within say 6 months. Every time you apply for a credit card or loan, there is a hard inquiry. Too many hard inquiries within a short period will project you as financially unstable and desperate to creditors.
Don’t Close Old Accounts
Leave your old credit accounts open, so that you can increase your credit age. Having old accounts in your credit reports will improve your credit history rating if they have a positive credit history.
So what steps do you take for rebuilding credit?
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