What you can do to bounce back from credit problems
Maybe you’ve had some major credit trouble in the past, and you’d like to find a way to start fresh. Or maybe you never realized you had a credit problem until you were turned down for a loan or had your rate raised on an existing credit card. All of these situations can be signs of a credit problem.
Fortunately, there are steps you can take to rebuild and repair your credit history. Just remember, if you don’t think you can handle it alone, get help. (See Credit Counseling.)
1. Get the facts.
The first step is to get copies of your credit reports from all three credit bureaus. You’re entitled to a free copy from each bureau every year, and another if you’ve been turned down for credit. If you do get turned down, the credit company will send a letter to tell you why, and which credit reporting agency they used. Review your credit reports carefully. Are there errors that are affecting your credit score? Do you have a lot of late payments or unpaid bills? Or do you just have way too much debt in relation to your income? You can’t fix the problem until you know what it is.
2. If your credit report has errors, fix them.
Start by marking every suspected error on a copy of the report. Then send a letter to the credit agency explaining your dispute and requesting an investigation or fill out their online dispute form. You may need to provide copies of any supporting documents. If the credit bureau can’t confirm the disputed entry within 30 days, they are required to delete it.
Even if negative items are true, you can still make things better. If the entry refers to an unpaid debt, pay it off if you can, or contact the creditor to discuss payment options. If there has been a dispute, you can add a note to your credit report explaining your side of the story. And most bad entries will eventually fall off your report, giving you the chance to demonstrate your new, improved financial habits.
3. Control your spending.
Paying all your bills on time, every time, is the most important thing you can do to build a better credit history. If you haven’t been doing that, figure out why. If you’re overspending, create and stick to a monthly budget to help you identify where you can cut back. If you need help getting organized, you may want to consider online banking, and have payment reminders sent to you by e-mail. There are also many other budget tools available online.
4. Pay off debt.
It’s a good idea to keep your credit card and other loan payments—not including rent or mortgage—at less than 20 percent of your net monthly income. If your debt payments are more than that, there’s only one solution: Pay down your debt. See Dealing with Debt for more suggestions, but here are some ideas to start with:
- Talk to your creditors. They may be willing to reduce your payments or your interest rate.
- Make as tight a budget as you can and stick to it.
- Pay more than your minimum payments. Even a little more each month can help reduce debt faster.
- Stop using your credit cards for non-essential purchases. Learn to say “no” when you don’t have available cash.
- Increase your income. Get a part-time job, hold a yard sale, and consider what you can do to come up with more money to pay off your debt.
If you can’t handle your debt on your own, get help. See Credit Counseling.
Managing Credit Tip #4
If you're having trouble with debt, don't put your head in the sand. Talk to your creditors, work out a payment plan, or consult a credit counselor.
5. Start fresh.
After your debts are paid off you’ll need to start building a new—and better—credit history. That means taking on small amounts of debt that you can pay off every month. Over time, the record of those on-time payments will provide proof of your new credit habits.
A credit card can make this easy. If you can’t qualify for a regular credit card, consider a secured credit card. With a secured card, you deposit cash with the issuer, who then lets you borrow up to the deposit amount.
Don’t fall for the “easy” answer.
Plenty of companies will tell you there’s an easy, painless way to make all your credit problems go away—as long as you pay their fees. Don’t be fooled. Most of the time, even if their methods are legitimate, you could do all the same things yourself for free. The fact is, rebuilding your credit history takes time. But the effort is worth it.