One of the most frequently asked questions I get from my clients (after “How much does this cost?”) is “How can I rebuild my credit after all this is over?”
I suspect that most of those asking are hoping for a quick fix, a magic bullet they can fire and raise their FICO score a couple hundred points. Not surprisingly, it isn’t usually that easy or fast.
But with some good habits and sound strategy, credit rebuilding can be accomplished for almost anyone.
First a quick recap of the parts of your credit score.
The score takes into account not only payment history (both recent and long-term) but how much credit you have available as a ratio of your limit, how many accounts you have open, as well as for how long. This information is then stuck in the magic black box, and out pops a FICO score.
Once you have trashed your credit (resulting in a bankruptcy or not), the long-term payment history isn’t going to be your friend, but many of the other factors can be corrected and improved.
The first, and most obvious, step is to bring any open accounts current and keep them that way. For my bankruptcy clients, continuing timely repayment on a car or house note is the first and best way to begin credit repair.
But to rebuild, you need to stop any continuing negative reports, whether by paying them, discharging the debts, or disputing the debt.
As you move forward, the recent payment history becomes most important, and maintaining good payment habits is a must to improve that credit score.
Wise credit rebuilders also will monitor their credit report closely and dispute incorrect items. Most credit bureaus don’t spend a great deal of energy verifying information reported to them. They only work on such items when the mistake is brought to their attention, so many (if not most) credit reports have some errors in them. You can either choose to dispute these items yourself, or hire a credit repair company to help you. If you hire someone, make sure you choose someone with a local presence and carefully consider the costs and terms of any agreement you sign with them. We have a couple of good ones around Lee’s Summit, and how/what they charge for what they do is different, so call around.
If you don’t have any open accounts, and that is holding your score down, you may consider getting a secured credit card. A secured card requires that you front your own credit limit and then use the card as a normal credit card, with the credit reporting you are looking for. While it’s a useful tool for rebuilding credit, be very careful when shopping for this kind of card. Most of these cards charge “membership fees” and other service charges, and you want to minimize these costs, so you can use more of the money you lend them.
Another helpful tool has recently come out of credit unions, called “credit rebuilding loans.” Essentially, you deposit money with a credit union in an interest bearing account, and this deposit is treated as an installment loan and is reported as timely paid during its duration. You give up access to those funds for a year, but help rebuild your credit score at the same time.
Both a rebuilder loan and secured credit cards are smart places to put some of your tax refund if your goal is to rebuild credit in 2012.
As you begin to improve your score, you may gain access to more traditional forms of credit, like an unsecured credit card or line of credit. These can be used to further build your score, but once again exercise caution in getting and using credit, keeping your liabilities manageable and small. Not only do the credit reporting agencies look at the number of cards and payment history, but they also look at the balances on the card. It is best to use a card and pay it off every month, if you are going to use it.
By managing the factors of credit scoring you can control and affect, you can begin to rebuild a credit score, even if you have had a bad time in the past.