Millions of Americans are suffering from dinged-up credit as a result of the recession. Regardless of what has happened to you financially - whether you have gone through foreclosure or bankruptcy or made a seemingly less major financial mistake such as making late payments on your credit card bills - it is possible to rebuild your credit. Here's how. (Do you know how your borrowing activities affect your credit rating? Find out in The Importance Of Your Credit Rating.)
Review Your Budget
It's critical that you understand how much income you have coming in versus how much you are spending both on fixed expenses (i.e. mortgage or rent payments, tuition, car or student loan payments, etc.) and variable expenses (i.e. utilities, cell phone bill, clothing, etc.). Until you get a clear picture of your financial situation you won't be able to make changes to rebuild your credit. You can use software like Quicken or Microsoft Money to build your own budget.
Next, identify your financial priorities and make changes like boosting your income and/or reduce your expenses to be able to meet those priorities. (Can you have perfect abs in just six minutes a day? Maybe not, but you can have a rock-solid budget in six months. Find out how in 6 Months To A Better Budget.)
Get a Copy of Your Credit Report
You need to know where you stand credit-wise before you begin working with creditors and making different financial choices to improve your credit score and standing. By law you are allowed to obtain one free copy of your credit report annually through Annualcreditreport.com. Request a copy and review it carefully.
If there are any errors, contact the agencies in writing (making sure you keep a copy) and ask them to investigate the issue and make the correction. The credit bureau is required to take action and notify you of its findings within 30 days of receiving your letter.
Contact Your Lenders
It is always best to contact your lenders or services providers (such as your utility companies or physicians) as soon as possible when you face financial difficulty so that you get their help to stay current on your accounts.
Call, email or write your creditors to explain your financial situation (for example, if you have experienced a job loss or unexpected set of expenses like a medical emergency). Discuss a new payment plan and make a good faith payment to begin improving your account status.
Pay Bills On Time
Credit reports record your payment habits on all type of bills and credit extended, not just credit cards. To improve your score make sure you pay all your bills on time including your rent/mortgage, utilities, doctor's bills, etc. Keep documentation (like canceled checks or receipts) to be able to prove that you made timely payments.
Stay At Your Job
Job stability is a good indicator to other lenders that you will have the ability to repay a loan. If you have a spotty resume, make the choice to stay in your current position for at least a year or two to build lenders' confidence.
Use New Credit Wisely
Once you have begun working on a repayment plan for your existing debt be sure to use any credit cards or loans you have wisely. Make payments on time, avoid going over your limit and pay the balance in full or make at least more than the minimum payment due each month or billing period.
If you don't have a credit card or you closed your accounts, you may want to consider applying for a new account only after you have consistently stuck to your budget for several months to begin rebuilding your credit history. Use it only for budgeted expenses like groceries or gas, and pay it off according to the terms of your agreement.
Creditcards.com provides a list of lenders that offer credit cards for people with bad credit. You could also apply for a retail credit card from a department store or gas companies (such as Chevron or ExxonMobil) which often readily extend credit.
If you can't qualify for an unsecured line of revolving credit, meet with a loan officer at your bank to discuss applying for a secured card. With a secured card you make a deposit with your bank or lender (that represents your credit limit) and you can only charge up to that amount.
You can use the card to improve your credit record and score by making charges and paying on time. Often lenders will allow you to convert to an unsecured card once you have made the required number of on-time payments.
By responsibly managing your credit account, your positive payment habit will be reported to the credit bureaus which will in turn alert other creditors to you being a good credit risk. (There are many avenues from which to drum up funding. Find out the pros and cons of each in The Best Way To Borrow.)
Beware Of Scam Artists
You can correct credit report errors and rebuild your credit by yourself. You may choose to use the services of a credible nonprofit credit counseling agency but beware individuals, organizations or "credit repair clinics" promising to fix your credit woes.
If you are approached with an offer of help, make sure that they provide you with a copy of the "Consumer Credit File Rights under State and Federal Law" and a detailed contract for services including contact information, stated guarantees and an outline of fees and services before you provide any personal information or turn over any financially-related documents.
Ask for references and contact them, do online research to verify their credibility and keep copies of all paperwork and correspondence in case a dispute arises. (Paycheck to paycheck is no way to live. Learn how to find the help you need in How To Find A Credit Counselor.)
The Bottom Line
If your credit score has suffered this past year, you are not alone. Rebuilding it will take time, but it is possible with the right plan.