Whether your credit score is struggling to get above 600 or if you’re having difficulties in applying for a loan with favorable terms, or you just want to improve your credit score to get a lower interest rate for a loan you’re planning to acquire, you will need to initiate a process to rebuild credit score as soon as possible.
You are not alone. Believe it or not, the average FICO score for US citizens stands at 678, which is barely above the danger line score of 620. 15% of adults in the United States even have credit scores below 550, making them ineligible from any types of loans from financing companies. These numbers show that, indeed, the process to rebuild credit history is a very important – if not a highly necessary – procedure that many Americans should seriously consider.
The good news is that you can fix your credit score. Depending on what your current FICO score is, the process may take at least 6 months to as long as 2 years, hence, your patience and commitment are essential in making this process successful. It’s not going to be easy, but neither is it as hard as some people may think.
Below are the steps that are needed to be undertaken in order to rebuild credit.
STEP 1: Get A Copy Of Your Credit Report
Without your credit report, you may not know your current FICO score, and more importantly, you will not know, with accuracy, the details that led to that number.
Getting your credit report is a simple procedure. All credit bureaus are mandated to provide a free credit report per year to any person who will order from them. This free credit report, however, will not include your credit score. If you want to get your FICO score together with your free credit report, a minimal fee of $5.95 to $7.95 will be charged.
You can get your free credit report from the 3 credit bureaus, namely Equifax, TransUnion, and Experian.
If you have some money to spare, My Credit Keeper is a good credit evaluation service that gathers data from the 3 major credit bureaus mentioned above. My Credit Keeper is a cost-effective credit monitoring service operated by HSBC. It is very convenient to use as it allows you to check your credit details online, anytime you wish.
At least one credit company, Credit Karma, provides free credit scores, so it is worth your while to inquire with them as well.
Getting your credit report is a critical first step in the process to rebuild credit. Your credit report is the backbone of all credit fixing strategies that you’re going to embark on. Its entries will determine the actions you will have to take to improve your credit score.
STEP 2: Thoroughly Study Your Credit Report And List Down Questionable Items
The goal is to eliminate disputable items from your credit report. By doing this, you will be removing the details that pulled down your score, and consequently, you’ll be able to increase your score in the process.
Many people find this step a little too superfluous. However, studies show that 92% of Americans who procure their credit reports find at least one error that they can dispute with the appropriate credit bureau.
Some of the more common causes of disputed claims include falsely reported delinquencies in payment, purchases caused by fraudulent acts such as identity theft, double charges which were left unchecked, unreported payments, mistake in labeling a report for a particular credit, and other similar happenings.
You must be able to clean up your credit report as best as you can. Creditors not only look at entries that immediately stand out – like late payments, charged-off accounts, and bankruptcies. They also look for patterns to determine your ability to pay for the loan you’re applying for. If the disputable items remain on your credit report, they will unjustly cast a negative reflection on your financial aptitude, and this may affect the grant of the loan you’re planning to get.
STEP 3: File Disputes And Keep Track Of The Dates
Once you have listed down the disputable items on your credit report, the next step in the credit repair process is filing your disputes with the appropriate bureau. Your free credit report comes with a dispute form which you can easily fill up with the items you feel were not legally included. If, by some chance, you would rather write a formal letter that will allow you more freedom to express the reasons why those items are disputable, you can opt to that as well.
File the completed dispute form or the letter you have prepared with the bureau that issued your free credit report. Include a photocopy of your credit report with the contested items encircled, for easier referencing.
You have to keep track of the date of filing. This is because the law can work in your favor. A credit bureau is only allowed 30 days upon receipt of the dispute to investigate the contested items and issue a ruling as to its veracity or lack of merit. If you do not hear from the credit bureau within one month after filing your disputes, then the contested items should be removed from your credit report. Most people miss this. They fail to have the contested items stricken off because they do not know the law or they didn’t keep track of the dates.
STEP 4: Negotiate With Creditors For Favorable Terms That Will Help You Resolve Your Debts
There are some items in your credit report that cannot be contested, and chances are, much work will still be needed once you clear your report of the disputable items.
The next step in the rebuild credit process is to prevent the addition of negative entries to your credit report.
If you’re finding it difficult to pay your existing debts, then you should negotiate with your creditors for terms that will allow you to pay them off as efficiently as you can without compromising the current state of your finances. Most creditors are amenable to this setup, as for them, a paid debt – regardless of the agreed-upon terms that may be more beneficial to the debtor – is so much better than an unpaid debt.
Here are the points that should be the subjects of your negotiation:
- reduced monthly payments;
- adjustment of due dates to organize the payment of your monthly bills;
- keeping the status of your accounts as “current” so that they won’t be reported as “delinquent” or “bad debt;”
- if dealing with a fixed loan, negotiate for an extension in payment schedule;
- if dealing with collection accounts, negotiate for a pay-off settlement in exchange for a reduced bill;
- removal of all derogatory remarks from your credit report.
Verbal negotiations are quite common in situations like this. However, it is highly recommended that such agreements are reduced into writing to protect your interests in case of bad faith on the part of the creditor.
STEP 5: Gradually Close Unnecessary Credit Accounts
This is a tricky step.
If you’re maintaining more than one credit line, it might be better for your credit repair efforts to slowly close down the other credit accounts, especially when you’re having a hard time paying off your debts. When pressed into a corner, your instinct will tell you to use any available credit line to ease the financial burden you’ll be encountering. The more credit accounts you have, the stronger the temptation will be.
However, closing a credit account can negatively affect your credit score if done incorrectly. You must be very careful in completing this step.
Try to close out the newest accounts you’ve acquired, as they carry a shorter credit history. Canceling an account with a longer credit history will only raise a red flag for the credit bureaus.
Do not close your accounts in quick succession, as such would also raise a red flag. Close them out over a period of several months.
Make sure that the credit accounts you have closed are reported as “closed by consumer” to reflect the best possible report for your credit score.
It is common for creditors to raise your credit limit, but this will also mean more temptation for you to use that credit line when your finances take a hit in your journey to pay off your existing debts. Only maintain credit lines with moderate credit limits.
If you only want to improve your credit score and your current FICO score is safely above 620, try to maintain credit lines with a total limit that constitute 200% of your total debts. The integral part is maintaining this balance over a period of time so that you’ll have a good debt-to-available credit ratio that will result in a higher FICO score.
STEP 6: Establish Stability To Your Finances
Essential in the process to repair credit is building a solid credit history, as this will tell the credit bureaus that you are financially reliable enough to handle future obligations. If you have satisfied the steps above, you have eliminated many of the factors that will pull your credit score down, hence, you can focus on building – or rebuilding, as the case may be – your credit history.
The most basic action is to pay on time, each and every time a bill has become due. The more bills that are paid on time, the faster people can repair credit scores.
If you find it necessary to open a credit line, choose one that can provide everything that you need during the rebuild credit process. Do not open more than what is necessary, as credit bureaus will consider this a negative and will result in an even lower credit score. This includes multiple inquiries for new credits, as they are also reported to these bureaus.
Open a savings account with your preferred bank. This act alone will show creditors and credit bureaus that you are committed to building a reliable credit history. This will also show them that, in due time, you will have enough to repay your debts.
Whether you’re planning to apply for a loan to buy a new home or a new car or any other need for you and your family, it is essential to have a good credit score to get the best terms possible. These terms include lower interest rates, better payment schedules, preferred rates on insurance policies, and the likes.
If your credit score is less than ideal, then you must devote yourself to rebuild credit. This is the only way to ensure that you’ll be awarded the loan to buy what you need, without having to suffer loan conditions that can seriously hamper your finances.