Six Steps to Repairing Bad Credit
It can happen to the best of us. Miss a few payments on a house or car loan, open up a few too many credit cards in search of low introductory rates, or accrue too much debt too fast, and your credit report can start to look unappetizing to lenders. It’s easier than ever to fall into the bad-credit cycle, and credit card companies are continually on the lookout for excuses to add to your interest-even sending in an electric or phone bill late can affect your credit. And the worse your credit report looks, the tougher it will be for you to get good financing deals on your house, your car, your credit card-and other necessities of life.
But don’t worry-this problem has a solution. If your credit report has seen better days, there are steps you can take to improve the situation. Follow these tips to improve your credit report.
Step 1: Know that there are no quick-and-easy solutions. When they realize that they have to do something about bad credit, one of the first things many people do is respond to one of those ads for credit repair services. You know the ones we’re talking about: they send fliers and run ads all the time claiming to be able to erase your bad credit history.
The truth is that most of these companies are scams. They will ask you to pay up front, and at best they’ll disappear with your cash. At worst, they’ll perform fraudulent services for you-such as getting the Internal Revenue Service to issue you an Employee Identification Number (EIN) to use in place of your social security number, effectively giving you a new credit identity. This is illegal, and could get you charged with fraud. They may also charge you to get a copy of your credit report or to dispute claims on your credit card-both of which, by law, you can do for free yourself.
Step 2: Get a copy of your credit report. By law, you are allowed to request one copy of your credit report once a year at no charge. There are three nationwide reporting companies that provide a central website, phone number, and address to use when requesting a credit report. To get a copy of your credit history, go to this website, call 1-877-322-8228, or mail your request to the following address:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
If you send in a written request, you’ll need to use the Annual Credit Report Request Form, available < a href=“http://www.ftc.gov/credit/”>here. Once you have your credit report, check it over for any mistakes.
Step 3: Get your current bills in order. Once you’ve made sure your credit report is accurate, sit down and get your bills and payments organized. Many people get bad credit simply because they’re not organized. Take stock of all your monthly bills, including utilities and services as well as loan payments. Add up your monthly payments, plan a budget, and set a regular date for bill payment. Organize your paperwork and financial records, and keep your bills in an accessible, easy-to-find place. If you can, set up monthly automatic payments for electric, gas, and other service bills through your bank. That way, payments are deducted from your account each month, and you’ll never miss a payment.
Step 4: Contact your lenders. If your credit problems are severe, it can help to get in touch with individual lenders. Explain that you are taking steps to repair your credit, and ask if there are any services they can offer to help you. Lenders appreciate hearing that you are doing something about your debt, and they may be willing to help you with monthly payments or interest in order to get your debt paid off as quickly as possible.
Step 5: Reduce the amount of credit cards under your name. Even if you have no debt on eight of the ten credit cards in your name, simply having lots of credit card accounts open can damage your credit. Young people are especially susceptible to this-many will open credit accounts at their favorite stores to get a 15% discount on a purchase, with no idea they are damaging their credit.
However, it can also damage your credit if you close them all at once. Transfer your debt to one card-the one with the lowest interest, not the one with the best rewards-and ask your lenders to stop charges on the rest. This will keep you from spending on multiple accounts. You can then close unwanted accounts gradually, with less damage to your credit.
Step 6: Accrue some manageable debt. Once you’ve gotten organized, contacted your lenders, checked your credit report, set out a payment schedule for yourself, and gotten into the habit of sticking to it, it’s time to start actively repairing your credit. You can do that by getting some manageable debt and paying it off quickly. Start putting necessary purchases such as food and home supplies on your credit card-and, most importantly, pay off the debt that month. Over time, this will build a new credit history for you-one that indicates responsibility and a habit of paying off debt. You can also do it by taking out a small loan for something you need-don’t try this with a non-necessary item, or you may not have enough left over to buy necessities.
If you find you aren’t being accepted for even these small loans and credit accounts, ask a family member to co-sign for you. However, be aware that your payments will affect their credit history-and the most acrimonious court battles are often between family members in this situation. If you have no other choice but to ask a loved one to co-sign, protect them by drawing up a written agreement outlining your monthly payments and obligations. This will protect them if there’s ever a dispute.
Bad credit can stick with you a long time. But it’s fixable. Follow these simple tips, and you should see a marked improvement not only in your credit rating, but in the way you handle your finances-a skill that’s good for life.