Perhaps you lost a job and had trouble keeping up with your bills. Or you found yourself with an unexpected expense that ate up your budget.
There are a lot of ways one’s credit can take a hit. The important thing is to start rebuilding your all-important FICO score now so when you need a loan down the road, you’ll be able to get one with favorable terms.
Raising your credit score usually doesn’t happen overnight since negative items remain on your report for years. But the good news is that making good decisions today pays off. Recent activity has significant influence on FICO computations. Here are some easy steps you can take to get your credit back on track.
Review Your Credit Report
Late payments or accounts going into collection are bad enough; having errors on your credit report only makes things worse. One of the fastest ways to raise your score is having the appropriate credit bureau – whether TransUnion, Equifax or Experian – correct any mistakes.
Get a copy of your credit report and inspect it closely for inaccuracies. For example, verify that the amount you owe on each account is accurate. And look for any accounts you paid off that still show as outstanding.
If there’s anything awry, contact the credit bureau in writing and request an amendment to your report. The Federal Trade Commission recommends sending your letter via certified mail and requesting a return receipt so you know the bureau received it. Be sure to document any correspondence with the reporting agency so you can reference it later.
Consider a Secured Credit Card
If your FICO score gets bruised, going cold turkey when it comes to using credit is one of the worst things you can do. In fact, responsible borrowing is one of the better ways to rebuild trust with lenders.
If you no longer have a credit card, getting the standard type may be tough. Don't give up: A secured card is often a good way to go. With a secured credit card, the borrower makes an up-front deposit that serves as collateral for the account. Often, the bank will extend a credit limit equal to or slightly less than the deposit amount.
There’s a lot less risk for lenders this way, so they’re more apt to offer secured cards to consumers with less-than-stellar credit. Just make sure you use your card responsibly.
Hold On to Those Old Accounts
Often, when revolving credit lines and other loans get people in trouble, the first instinct is to start closing accounts. As it turns out, this is one of the worst things a borrower can do.
For starters, older cards are treated favorably by credit reporting agencies. In addition, terminating accounts increases the percentage of total available credit that you’re using – and that will reduce your score. As long as you can avoid the temptation to overuse them, hanging onto to those existing cards is a smart idea.
Pay Your Bills on Time
The biggest factor when it comes to credit scoring is your payment history. If you’ve had trouble paying loans on time in the past, there are a few ways to turn that trend around.
Fair Isaac Corporation, which calculates FICO scores, recommends signing up for payment alerts if your lender makes them available. You’ll get an email or text message announcing the impending due date, making it harder to forget a payment.
Another approach is to set up automatic drafts from your bank account. The downside is that these automatic payments may only cover your minimum payment, when your goal should be lowering your outstanding debt as much as possible. But if this is what it takes to keep your account in good standing, it’s probably worth a try.
The Bottom Line
After falling behind on your accounts, improving your credit rating can be a long process. The sooner you get started, the quicker you’ll see your score inch upward. Once you know your credit history has taken a hit, don't react without doing research. The key to restoring your financial trustworthiness isn't cutting ties with credit altogether – it's correcting mistakes, building up a good payment history and holding on to your credit cards without over-using them.