Tuesday, 11 May 2021

6 Steps to Take to Rebuild Your Credit Score

Managing your personal finances can be a tricky and stressful task if you don’t have a virtually limitless income. In order to ensure your financial well-being stays intact, it’s important to budget your money wisely, maintain a low level of debt and ensure that your credit score is sound.

With credit scores specifically, it can be all too easy to cause temporary or permanent damage that can affect your borrowing potential. Many people are unaware of the ways in which they endanger their credit ratings on a regular basis. It’s vital to avoid these potential risk factors and maintain a solid credit score.

Sometimes, the reason you’ve taken a credit hit is not because your income was insufficient, but because you didn’t track expenses closely enough and things got out of hand.  If you need to track personal finances better, try out something like Mint or YNAB, which make it easy to budget and see where things are going.  If you own a small business that runs through and affects your personal accounts, then you can use something like Xero vs. Quickbooks or another accounting app for freelancers.  If you know exactly where your money’s going, then it’s easier to make the choices you need to make to keep them less than your income.  If you don’t keep track, you’re flying blind — and you could end up upside down.

But what should you do if the damage is already done and your credit score is less than exceptional? Today, we’ll walk you through six steps that you can take to rebuild your credit beginning today.

How Long Does It Take?

Perhaps the most common question in situations like these is “How Long Does It Take to Rebuild Your Credit?”. This is a complex question and the answer ultimately depends on several factors.

First of all, how extensive is the damage? In more severe cases where bankruptcy is involved, it can take the better part of a decade for your credit to be fully vindicated. In the event there hasn’t been a bankruptcy filing, but numerous dings to your credit score still exist, it can be a matter of several years before a good credit score is established. In cases involving the latter, paying off those existing collection debts is vital to resetting the clock as soon as possible and beginning the process of repair.

Open a Bank Account

If you have a poor credit score from too many unpaid loans, bankruptcy or other factors, then you’re probably strapped for cash. Even if this is the case, having a bank account is one of the most basic components of having a solid credit score.

Institutions and lenders will look to see whether you have a bank account, in part to determine your available assets. While you may not necessarily have a lot of money to keep in your checking account at any given time, lenders see a lack of a bank account as an immediate red flag and potential liability.

The more accounts being transmitted to the major credit bureaus, the better – at least, when they’re solvent and/or not delinquent. Whether you’re applying for a new credit card, improving your credit score or merely wanting to cash a check, having a bank account is simply good financial sense.

Pay Off Existing Debts on Your Credit

With instances like bankruptcy, most, if not all, debt is wiped away. While the ding of the bankruptcy itself will still remain, the individual collection accounts and accounts themselves disappear.

If you’re simply in a bad financial situation and haven’t declared bankruptcy, however, then it’s important to tackle the relevant debts damaging your account head-on. After debts head to collection, they can usually be negotiated with the collection agency to lower the amount owed. The longer the debt has been owed, the more it will usually be discounted in a settlement/agreement with the collection agency. In cases where it’s feasible, offer to pay off the entire balance same-day if the agency is willing to provide a significant discount on what is owed.

At any rate, once these debts are under control and paid in full, the real proactive steps to rebuilding your credit score can begin.

Pay Any Current Debts on Time

Once you’ve addressed the past damage and are on track to resolving the matter, it’s important to ensure that the problem doesn’t happen again. Any existing debts or bills owed must be kept current in order to avoid undoing the progress you’ll make in rebuilding your credit.

Keep in mind that not only do many utility companies and businesses report owed amounts to the credit bureaus shortly after those accounts go into default, but they may also report your payment history as well. This means that habitually paying your cell phone bill after the due date can continue to impact your overall credit score.

Obtain a Secured Credit Card

With your credit in shambles, it can be very difficult to obtain any line of credit. Yet, it is vital that you obtain a line of credit as part of the credit rebuilding process.

Secured credit cards are lines of credit specifically offered to those who lack good credit scores. They work by either using collateral in your bank account or a deposit provided by you to back up the credit line itself. As you gradually use the card responsibly and pay off the amount owed each month, your credit score will begin to recover. Paying off your credit online is even more advantageous since it allows you to make payments, reducing the likelihood of forgetting a bill. However, be wary of hackers online if you don’t an encrypted VPN to secure traffic since that would further damage your credit score.

Many people mistakenly think that avoiding credit altogether when undoing credit report damage is the right avenue to take, but this is the opposite of the truth. You absolutely need to be using credit – responsibly – during any effort to improve your credit score; not using lines of credit available to you can actually harm or stall your credit score’s progress.

Earn a Small Loan

Once you have a track record with your bank of paying your credit card balance each month and using your bank account responsibly, you can then approach them about obtaining a small installment loan.

Car title loans are an example of an installment loan that can improve your credit. As the loan is paid off in a timely manner it will reflect positively on your score and help you build a positive credit history.

These loans can be used to further improve your credit score – much in the same way that student loans and other forms of borrowed money can – as you pay off the loan on-time each month. We recommend not borrowing too much – a few hundred dollars is often enough in the beginning. Having a consistent on-time record of paying off loans will further improve your credit standing.

Get a Credit Boost from a Friend

Last but not least, talk with a friend or family member about being an authorized user on one or more lines of credit. In short, becoming an authorized user ensures that their credit habits for those lines of credit will also be reported under your name as well. This can help further boost weak credit due to the financial habits of those who are the primary holders of the account(s).

These six tips can be used in conjunction with one another to gradually rebuild your credit score and improve your financial situation. While it won’t all happen overnight, following these tips can gradually improve the ratings financial institutions give to you, which in turn will make it possible for you to borrow more and pay less in interest.