You have been turned down for a car loan, and you are really bummed. You knew your credit was bad, but this car dealership advertised that bad credit was okay. Bad credit, unfortunately, meant a higher score than yours, which evidently is in the proverbial basement. Maybe you had to declare bankruptcy; you may have student loans that have gone into default; it could have been a foreclosure; and it just may be that you have five credit cards all with past due balances, some of which have already gone to collections.
You really don’t want to hear, “I told you so,” from friends and family, so you are going to work this out on your own — good for you. It will be painful, but you can do this. And here are the 18 steps that you will take.
1. Get copies of your credit reports from all three reporting agencies. You can do this by going to AnnualCreditReport.com and requesting them — you get a free one every 12 months, by law, so get on it right away. When you get it, here is what you do:
A. Check everything on them, line by line. You are looking for any mistakes. Are the balances being shown correct? Are any showing late payments that were not late? Is everything listed actually a debt of yours? (Yes, mistakes are made, usually because two people have the same name).
B. Is there anything bad on there that is over 7 years old? It must come off. (Except bankruptcies — they stay on for 10 years). And if you had a bunch of debt discharged with a bankruptcy, those debts should no longer be showing. If they are, you need to send copies of your bankruptcy discharge to those bureaus.
C. If you find any mistakes, you have to start the dispute process, and it can get a bit tedious, but remember it is worth it.
2. Set up reminders for payments. If you normally pay online through your bank, ask you bank to do this. If you don’t, then ask each creditor (including utility companies) to send you a text or an email to remind you. The first thing you have to understand is that even though you may be behind in payments right now, you are going to start making payments on time with constant nagging once in a while!
3. Reduce Your Debt: You’ve heard this before. Cut up those credit cards. Some people keep only one, just in case of emergencies, but it is risky if you don’t have enough self-control. Now the rules for paying off that debt:
A. Make a list of all debt you have. Most of it (except for a mortgage or student loans) will be credit card or medical bills. List them according to the amount of total debt, starting with the lowest.
B. Make minimum payments each month except for the one at the top of the list. That one, you are going to pay as much as possible, until it is paid off. Once it is paid off, take all of the money you were paying on that first one and add it to the monthly minimum you were paying on #2 on your list. When #2 is paid off, you take all of the monthly payment and dump it onto #3 each month, and so on.
4. Pay your bills on time. A big part of your credit score (35 percent) is payment history. If you are late with even one payment, it stays on your report for a year and lowers your score.
5. If you have missed payments, get current as quickly as possible, even if it means you can’t begin working on your list yet.
6. Utility bills count. A lot of people think that late or missed utility bill payments don’t go on a credit report. Yes, they do! And they lower your score.
7. Paying off a collection account will not get it off of your report, but if you do pay it off, it will fall off after a year. If you don’t, it’s there for seven years!
8. If you can’t make all of your payments call the companies and set up lower payments. They will work with you (they want their money even if it takes longer). If you are “shy” about this, go to a free credit counseling service — they’ll do it for you.
9. Reducing high balances: Here’s the thing: If you have a credit limit of $3,000 on a credit card, and your balance is consistently $2500, your score will be lowered. You need to keep any balance on a card less than 50 percent of your credit limit to get a higher score.
10. Don’t just move debt around: Those balance transfers may seem like a good idea, but if it means you get a new credit card, you score could be lowered because you got it.
11. Getting a new credit card once all of your bad stuff is paid off. Your score will still be low so you need to shop for the best interest deal. And look for one that does not have an annual fee if possible.
12. Don’t close accounts on those cards you tore up. Every time you close a credit card account, your score takes a dip. Why? Because they think you might be in financial trouble.
13. Don’t open up new accounts: Every time you check out at a retailer, they always tell you how you can get 20 percent off by opening up a charge account — DON’T DO IT! Your credit score takes a dip, and there is that temptation to then use it.
14. If you close accounts, close those that are the newest. The longer you have an account and pay it on time, the higher your score will be.
15. When you shop for a loan, do it within a week. They will all pull your credit score, and you want the credit bureaus to know that you are only shopping for one loan. All those credit pulls can lower your score.
16. Request a credit report even if it has not been 12 months since your last one, if you are wondering about anything. There will be a fee, but it won’t ever affect your score for you to pull it.
17. Building up your credit after you have cleaned up your act does not mean applying for several new credit cards. This was part of your original problem, so let’s not go there again. Try to get by with just one, two at the most. Your credit limit may not be very high at first, but over time, you can request raises, if you have paid on time.
Repairing credit takes time, so don’t be suckered in by companies promising to get it repaired in just a few months. They are lying to you, and you end up paying them a fee for doing all of the things outlined here.
Now for the Bonus: There is one way that you can boost your credit by small but steady increments, especially after a bankruptcy or after you have cut up all of your credit cards and are making steady payments. Go to a bank and get a pre-paid credit card and put whatever you can on it. You can use that card for purchases up to the amount you put on it, and it will not let you go over. Once you have used up the money, put some more on it (keep the same card), and do the same thing. That card gets reported to the credit bureaus just like any other credit card, and it will show that you paid your balance in full, not just that you are making payments. This is a big deal, and it can raise your score as much as 40 points or so every couple of months!