You may believe or have been told (by a lender or one of your creditors, possibly) that your credit is a mess but that’s a pretty broad statement. What exactly does it mean? It could have any one of a number of meanings and to rebuild your credit you must know what is “messing it up”.
The first step starts with knowledge.
- Your credit situation means nothing without your credit report. Before you can move forward you must know what appears on your report. Obtain a copy of your credit report from each major credit reporting agency (Experian, Trans Union, & Equifax). Even seemingly positive reports can have incorrect information and of course, incorrect information can create much “messiness” on your credit record. You need to know exactly what your report says about you, because not knowing can lead to greater problems down the road.
- Review your report. Following the directions provided with the report, dispute any information that is incorrect (collection items you have paid that still show a balance outstanding, etc), out of date (an old credit card reference that should have been removed according to the Fair Credit Reporting Act) or not valid (someone else’s credit or identity profile, addresses or employers that were never yours, etc).
- Address the remaining negative listings – make a budget that allows for a repayment plan for any debts that remain and must be paid off. (Or talk to CAF about debt management programs we offer).
- While you cannot remove information that is negative and true, once your report is in the best condition possible, time is on your side. Your report will improve as the negative references get older.
- Carefully monitor your current financial situation so as not to create any new negative information. Take this time to place yourself in a better place financially. Your credit probably became “messy” because of an event (job loss or divorce) or habit (as serious as abusive gambling or as unlikely sounding as procrastination?) that drove your finances over the edge. Seek ways to resolve any other issues that contributed to your credit difficulties.
How do you get to a better place financially?
- Create a new positive credit reference by focusing on paying all of your current debts on time and continue to do so. Making payments on-time once, twice or even for 6 months may not be enough to get your credit back in shape. Consistency of on-time payments is the key.
- Never use more than 50% of the available balance on your credit card when you get it.
- Always pay more than the minimum required on your credit card at least 10 days prior to the due date.
- Avoid higher risk credit – payday loans for example.
- Start a savings program. Join the retirement plan at work. Take advantage of direct deposit out of your paycheck to a bank or credit union savings account to which you have no ATM access. Every dollar that you can put in a savings account and leave there will build the habit of saving. Don’t be afraid to start small. (Just be sure to start!) Quantity will take care of itself over time and as your balance increases, this success (which may seem small at first) will encourage a continued commitment to savings growth.
- Conserve your credit options. Every time you apply for credit, an inquiry from the creditor will appear on your report. Many people do not realize that the act of applying for credit too often in itself is used as a reason to deny credit. You can be denied credit for too many inquiries on your file. Excessive inquiries can be as few as 3 in a 6 month period. Creditors believe that either you have obtained all of that credit and are not disclosing it (making you a bankruptcy risk with too much debt) or you have been denied by all of those creditors who must have had a good reason (so they don’t want to be the ones who take a chance).
- Consider obtaining an account (just one!) that will be reported to the major credit bureaus showing you can manage monthly payments over long periods.
You will find rebuilding your credit worthiness a combination of ensuring accurate data, increasing financial awareness, following a spending/savings plan (budget), paying off bad debts and paying current debts on time. Ideally, your credit report or history reflects the careful management of money over time. So take the time, to make the time to do it right. Understand, regaining your footing firmly on the right track will take time and effort, but not taking action now will only find you farther down the wrong road in the future.