How to Rebuild Your Credit

Is your credit score low? Are you drowning in debt? A bad credit score can keep you from being able to buy the items that you need. It can also force you to have have to get someone to cosign a loan for you. Follow these steps to get on the path to rebuilding your credit.

1. Bring all new past due balances current. Pay any new past due balances that have not yet negatively impacted your credit or been referred for collection. This will help stop any new judgments or wage garnishments. Sometimes just making a payment on a debt can keep it from being referred to a collection agency. The 1st step to rebuilding your credit is to head off those things that can drop your credit score even lower. Get every past due account below the maximum limit.

2. Examine your credit report. Most unsecured debts that are at least 7 years old should be dropped from your credit report under the Fair Credit Reporting Act. Each state has a Statute Of Limitations(SOL) that states the maximum amount of time that a lender can seek to recover funds. Creditors can no longer sue you for collection of a debt once the SOL has expired. Collection agencies will continually try to collect old debts that you don’t have to pay. Remember that companies will not request that negative information be dropped from your credit report so you have to. Alert your credit reporting agency that this old derogatory debt should be removed. Have any inaccurate information removed as well.

3. Negotiate with the creditors you owe. This can be by phone, mail or email. I have always found letters the best way to communicate with lenders because there is a documented record on file. It also saves you from threats and harassing communication from creditors. Send your creditors a debt settlement letter letting them know what you are able to pay. Many creditors will take pennies on the dollar to settle an old debt. Companies write off delinquent accounts as a bad debt expense each year so any money that they receive is unexpected revenue. You may be able to settle a $5,000 credit card bill for $1,000.

4. Build new credit. Once your past due debt has been paid up to debt, now its time to start building good credit. If you don’t have any open credit accounts then I recommend a secured credit card. Secured credit cards are cards backed by a deposit bank account. In order to get $500 worth of credit, you will have to deposit $500. Secured credit cards are good for people with no credit or bad credit. Buy one or two things and pay the balance off quickly. Keep the card for a year and you should receive offers for an  unsecured credit card with a higher limit. Remember to pick a secured card with low fees and a decent interest rate.

5. Pay your new debts on time. Pay all your bills within 30 days. If you want to have R1 credit it will take time. R1 credit is the highest credit rating and it means that you pay your accounts as agreed. You want to pay each debt as agreed with no late fee if possible. One trick I learned is that any debt that you pay within 30 days is reported as R1 even though the company may charge you a late fee. I do not recommend paying late fees but for those who juggle one bill to another it is worth knowing. After paying your debts as agreed for some time you should be able to get an automobile loan from your credit union with a fair interest rate.

6. Maintain your good credit. Keep your credit inquiries to less than two a year. At the most keep one unsecured credit card with little to no balance for emergencies. Keep your available credit higher than 70% on all of your accounts. By now your credit score should be good enough that you can purchase a home with a low interest rate.

This whole process may take time but after a few years your credit score should be in the 700 range.

Photo by Larry Page