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Chapter 3: Rebuilding Credit

All of your credit activity is tracked by your credit report. It includes the payment history and balances owed on credit and store cards, personal loans, student loans, car loans, and mortgages as well as credit-related legal activity, such as foreclosures, repossessions, evections, judgments, and bankruptcies. Your credit score is a numeric rating of the information in your credit report and is designed to measure the risk you won’t repay what you borrow. When you apply for new credit, the creditor typically checks your credit report and/or score to determine whether or not to approve you and what interest rate to give you. Landlords and insurance companies also frequently check them when deciding who to rent to and what rate to charge, respectively. Even some employers check them when making hiring decisions.

As you can see, having a good credit report and score can make life a little easier. However, when people are experiencing a financial crisis, they often do things that negatively impact them, such as skip payments or charge up high balances on credit cards. You can’t undo the past (most negative information can stay on your credit report for seven years), but there are many steps you can take to have a better credit report and score in the future:

  • Pay on time, every time – A commitment to never make a payment late again is one of the most powerful steps you can take to improve your credit rating.

  • Pay down existing debt – Even if you have never missed a payment, a large debt load will lower your score. Explore ways you can lower your interest rates and free up cash to make more than the minimum payments.

  • Avoid taking on additional debt – Besides paying down existing debt, make an effort to not take on more debt in the future. Ideally, you should not charge more than you can pay off in full the next month, but at the very least, keep the balances on revolving debt, such as credit cards, under 50% of the credit limit.

  • Dispute errors – Many credit reports contain mistakes. Perhaps someone else’s collection account appears on your report, or you were marked late on a credit card you always pay on time. That is why it is a good idea to periodically review your credit report from each of three credit bureaus: Equifax, Experian, and TransUnion. You can get a free copy of your credit report annually from the Annual Credit Report Request Service (www.annualcreditreport.com, 877-322-8228). If you see any errors, contact the relevant credit bureau and dispute them.

What if all of your accounts were closed? Besides paying off outstanding debt, there is not much you can do to improve your score without having active accounts in good standing. Getting new credit can be tricky if your credit score is low, but there are a few options. One possibility is a secured credit card. This type of card requires you to put down a deposit, which the creditor gets to keep if you do not make payments. While it is typically easier to get than a regular credit card, the credit limit is usually low, and the fees can be high. However, many creditors are willing to convert a secured credit card to a regular credit card after a year or two of on-time payments.

Another option is to ask a friend or family member who has a good credit history to cosign for you. Be especially careful with this type of arrangement. Any late payments you make will not only reflect poorly on your credit report but your cosigner’s as well. After six months to a year, you may want to reapply for credit on your own.

Beware of credit repair
Some companies claim to “repair” credit reports, often for a very high fee. At best, the company is charging you for something you can do yourself for free – writing a letter to the credit bureaus disputing inaccurate information. At worst, the company is engaging is dishonest and/or illegal tactics.

Credit repair companies frequently operate by flooding the credit bureaus with letters that dispute negative, but accurate, information. If they are unable to investigate the claims within 30 days, the information is removed. The company then shows you a cleaned-up report. This rarely works long-term, though. Even if the credit bureaus are backlogged with disputes, they will get to your claims and just reinsert the negative information when they verify that it is accurate.

Another common tactic credit repair agencies use is to issue consumers a “new identity,” complete with a stolen or new Social Security number or tax identification number to use in place of a Social Security number. This is an illegal practice for which the consumer often ends up paying the price. Remember, there is no legal way to remove accurate and timely information from your credit report.

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