Difference between revisions of "Repair Your Credit"

We all know that good credit is important, but most people struggle from time to time with too much debt, loss of income, or other financial emergencies. Collection agencies start entering the picture when payments are late or incomplete. People often file bankruptcy hoping for a new start, only to find their future credit is negatively affected for seven or more years. Understanding how to repair your credit is a far better alternative emotionally and financially.

#Review your [[Get Your Credit Report for Free|credit reports]] for accuracy. Your report may contain inaccurate information or might be missing important credit information. Contact the credit reporting agency in writing immediately to fix any errors. Be sure to provide complete and necessary information so that the agency can complete an investigation and repair any inaccuracies.<ref name="rf1">https://www.consumer.ftc.gov/articles/0151-disputing-errors-credit-reports</ref>

#Set up automatic payment reminders. Paying your bills on time is the most important factor in figuring up your credit score. Setting automatic deductions from your banking account for house and automobile payments, utilities, and credit cards will help you make timely payments. If auto payments aren't possible, set payment reminders on your calendar or budgeting software.<ref name="rf2">http://www.dailyfinance.com/2014/01/13/improve-credit-score-easy-way/</ref>

#* Don't cancel your credit cards. The debts are not canceled, and your credit report will suffer because there's less available credit as you pay off the debt. If you decide that some credit cards must be canceled, choose the ones with the shortest history.<ref name="rf3">http://abcnews.go.com/Business/credit-card/story?id=24603658</ref>  

#Set a budget and stick to it. A budget is simply a plan to direct parts of your income to specific expenses. Budgets can be simple or detailed. Determine how much you can comfortably set aside for savings and how much you can reasonably afford to pay of your debts. Try to lower your fixed expenses as much as possible so you can put more money towards fixing your credit.<ref name="rf4">https://www.debt.org/advice/budget/</ref>

#* For example, a reasonable budget might break down like this: 50% towards fixed costs (like housing, utilities, car payments, etc.), 20% towards financial goals (savings, pay down debt, retirement fund), and 30% towards flexible spending (groceries, gas, shopping, entertainment).<ref name="rf5">http://www.learnvest.com/knowledge-center/your-ultimate-budget-guideline-the-502030-rule/</ref>

#*The risk in debt consolidation strategies is that you don't change your old buying habits and you build new credit balances, multiplying overall debt. If you consolidate your debts, you must change your old habits to avoid a repetition of your recent situation.<ref name="rf6">http://money.usnews.com/money/blogs/my-money/2013/04/12/4-debt-consolidation-traps-to-avoid</ref>

#Order your free credit reports. Credit reporting agencies are required to give you a free copy of your credit report once a year, when you request it. You'll need to go to www.annualcreditreport.com to order the reports.<ref name="rf7">https://www.annualcreditreport.com/index.action</ref> The credit report includes a credit score and your credit history. Businesses and lenders use this to decide whether or not to offer you credit and what interest they'll charge.

#Understand your credit report. The report is made of of your credit history and other financial information. It's used to create your credit score, which is a number. The annual free credit reports won't give you a score, they'll just provide you the information that goes into calculating the score. This is the information you'll get with your credit report:<ref name="rf8">http://www.bankrate.com/finance/personal-finance/how-to-read-and-understand-your-credit-report-2.aspx</ref>

#Understand your credit score. This number, ranging from 300 to 850, represents your creditworthiness. Software developed by FICO and used by the credit reporting agencies determines the score. The scores between agencies should be similar, but there may be differences. It's important to make sure that your information is correct for each reporting agency.<ref name="rf9">http://www.experian.com/credit-education/understanding-credit-scores.html</ref>

#Learn what goes into your credit score. Scores are calculated by five weighted factors:<ref name="rf10">http://www.investopedia.com/articles/pf/10/credit-score-factors.asp</ref>

#Negotiate with your creditors. Make sure you know who owns your debt and keep in touch with them. Be open and honest with your creditors. If you know you're going to have a late payment or trouble paying, contact your lender. Your lender will most likely be willing to work with you.<ref name="rf11">http://www.nolo.com/legal-encyclopedia/dealing-with-debt-overview-of-32213.html</ref>

#Pay down current and past-due debts first. Don’t fall into the trap of paying off old debts by postponing payments of current debt. The late payment accounts are already reflected on your credit report and score. Keeping credit accounts current helps your score by having good credit sources that are older, rather than new.<ref name="rf12">http://www.bankrate.com/finance/debt/which-accounts-pay-first.aspx</ref> When paying off past debts, explain to your creditor that you are trying to become current and ask for help. Your creditor might:

#Get a [[Choose Your First Credit Card|secured credit card]]. Secured credit cards are a great way of having a credit card without the worry the balance will get out of control. You deposit money with the lender and your secured card will have a credit limit of that amount. As you use the card, you simply add to the balance each month.<ref name="rf13">http://money.usnews.com/money/blogs/my-money/2011/03/31/the-hidden-benefits-of-secured-cards</ref>

#Get a secured bank loan. Most banks and credit unions will make secured loans to their customers. Borrowing money, investing the proceeds in a savings account at the financial institution as security, and repaying the loan in small monthly payments builds your credit history. The interest paid on the savings account is likely to be 2%-3% lower than the interest charged on the loan. The extra interest must be made from the your other income.<ref name="rf14">http://www.finpipe.com/secured-loans/</ref>

#Be persistent. You won't see your credit score dramatically change overnight. Repairing your credit actually means repairing your credit history. The score then reflects this.<ref name="rf15">http://www.experian.com/credit-education/improve-credit-score.html#HowLong</ref> The best things you can do now, are pay your bills on time and pay down debt. Even then, it will probably take at least 30 days before these actions impact your credit.<ref name="rf16">http://www.bankrate.com/finance/credit-debt/tips-for-boosting-your-credit-score-3.aspx</ref>

#* Unfortunately, some negative history, like delinquencies or bankruptcies, will keep impacting your score for years.<ref name="rf15" />