Years ago I made a terrible financial decision of buying a house at the height of the real estate bubble. I couldn’t really afford it. I was young and listened to the wrong people. Pretty soon I couldn’t pay for it and then I couldn’t pay my credit cards either because I lost my job. House was foreclosed and credit card debt albeit fairly small was charged off.
Anyway, my credit score took a dump. For a couple of years I ignored it. I pretended like it was no big deal. I didn’t want to deal with it because I was embarrassed. Then one day I really needed to rent a car and they wouldn’t rent it to me without a credit card. After that I said enough is enough and decided to fix it.
My score went from around 450 to about 750 in a roughly two year period. I didn’t track the progress very well so the time frame isn’t precise but it was between a year and a half and two years. It will take about two years to get to a respectable score but it takes about a year and a half to get up to an average. This is my experience, yours may vary depending on your circumstances.
I personally prefer to pay for everything I buy in cash. But the reality of the world today is that you need credit for a lot of basic things like cell phone, internet, car insurance, car rentals. So it pays to have this part of your life sorted out. Especially that it really doesn’t cost you anything. All it really takes is time and patience.
Yes, I am sorry to disappoint, but its not going to take overnight. There is no magic to credit restoration. Don’t listen to people who say otherwise. It took me about two years. Good news is you don’t really have to do much. Once you set it up it’s kind of taking care of itself.
I am not a credit expert. All I did was research information online, read books, blogs and forums. I learned a lot about credit and credit cards. This is based on my personal experience fixing my credit history and score.
IF YOU RUINED YOUR CREDIT DON’T FEEL ASHAMED OR EMBARRASSED, EVERYONE MAKES MISTAKES
We all make financial mistakes especially when we are young. It’s not the end of the world by any means. It happens to millions of people every year for a variety of reasons. You may loose a job, have a medical emergency or you could simply be young and stupid like me. There would not be thousands of books, blogs and forums devoted to that topic if it was just you. There wouldn’t be a dedicated industry revolving around rebuilding credit if you were the only person in that situation.
Don’t you worry. With a little effort the whole thing could be solved. Most of the negative items will go out of your credit report in 7 years anyway. So in a way it’s good if you messed up while you’re young. You learn your lesson and by the time you are ready to shop for a house you can have a perfect credit.
FIRST STEP YOU NEED TO TAKE IS FIGURE OUT HOW BAD IS IT
I would not even look at my credit report because I was scared to find out how deep of a hole I was in. But you have to do it in order to move forward. Good thing is once a year you can get free reports from all three agencies at https://www.annualcreditreport.com.
Mind you they won’t have your score, only history. They are all pretty much the same but there could be discrepancies here and there. An actual score you’d have to pay for at each agency or get them all from FICO or some other company. Your scores will vary somewhat but not by much. I’d check up on all three reports and clean them up if necessary.
By clean up I mean check your reports for any possible mistakes.
I had a couple of items I didn’t expect on my report like a collection on some unreturned modem fee from a cable company of a city I moved out of years ago. I just paid that. I paid two items that were under $100 and asked a collection agency to remove items from my credit report. In one case it worked in the other it didn’t. Apparently credit agencies do not like removing items from your report.
But I did find a couple of mistakes on my credit reports that I disputed and they were taken out of my credit history. Disputing is easy as they now let you do it online directly from your credit report. It takes a couple of months or so for those items to be removed if your claim was found legitimate.
I’ve learned that paying off collection items on your credit report does not really affect your score positively so I decided not to do that. Unless there is a chance you could be sued for the debt (if you have high credit card debt) in which case you want to try to settle. Reason is it may cost you more if it goes to trial. You can find plenty of good advice on these matters at http://www.debtorboards.com forum.
You can always workout a payment plan with your original creditor or a collection agency your debt was sold to. Always try to negotiate down your debt. For your creditor getting anything from you is better than nothing. They know you can walk away and pay nothing so they are motivated to negotiate with you. Collection agencies pay pennies on the dollar for your debt. Use negotiation to reduce your total by as much as possible.
Although I ended up not paying my credit card debt I did attempt to negotiate and without much trying they offered to settle for half of my final balance. That was even before my account went to collection. It’s good to know that you have plenty of room to negotiate. As usual any final agreements with your creditor or a collection agency has to be put in writing.
THERE ARE NO SECRETS TO REBUILDING CREDIT
Its very simple – get credit and use it responsibly which basically means keep paying on time. That’s it!
How do I get credit if my credit score sucks? You need to get what they call a prepaid or secured credit card. They are credit cards in function but debit cards in reality. You can only spend what you deposit on them. You would need get two or even three cards preferably from different issuers. That way the whole rebuilding process will go faster. Good news is you don’t even need a lot of cash. Just deposit the minimum amount. In my case it was $450 total for two cards.
I had a prepaid card from CapitalOne for $150 (http://www.capitalone.com/credit-cards/secured-mastercard/) and another one from U.S. Bank for $300 (https://www.usbank.com/credit-cards/secured-card.html). They are pretty straightforward use them for your everyday purchases and pay them off right away or by the end of the statement period. I haven’t had any complaints with either company. Also I don’t promote them I’m just telling you what I’ve used. There are plenty of other companies you can get prepaid cards from it’s up to you.
After getting regular credit cards I closed both prepaid card accounts. It took 1-2 weeks to get the deposit back. They just send you a check in the mail. You could deposit more money on them up to a certain limit. After that it’s just a matter of time until your credit starts improving. They say closing cards is not a good idea as they factor in the longevity of credit accounts but I didn’t see any point in keeping my cash tied up there any longer and it didn’t really cause any damage to my score after I closed them.
Also try to keep balance on your credit cards to below 50% of the limit. Ideally it would be around 20-40% but 50 is an easier number to remember. It means don’t spend more than half of your credit limit at any point.
About every six months you can check your score and try applying for a “real” credit card. You will also start receiving credit card offers in the mail if you haven’t opted out. Look through them for best deals. I was mainly looking for cards with no annual fees and lower APR rates in the 10-20% range. I think I was able to qualify for a regular CapitalOne credit card within a year.
You could improve your credit even faster and further by taking on larger loans like car or college loans but I haven’t done it so I can’t comment. I buy cars used and pay cash for them. So far I’ve never had to borrow any money for college. My credit rebuilding is based solely on credit cards. Today I have two credit cards that I use regularly and a third one that I hardly ever use but it’s the oldest one so I keep it for now. I also have credit line with Amazon.com and that’s it. I pay them off every month in full.
There are people who get into credit problems because they can’t control their spending. This could partially be blamed on the whole credit system which is set up so that it’s easy for people to fall into debt. If you pay your credit card balance in full every month you’re not making credit card company any money. You’re using their money for free. So it is in their interest that you have a balance on your credit card that they could charge interest on. That’s how they make money. That’s what all those cash back points are meant for – to make you spend.
All that being said at the end of the day you’re the one responsible for your spending habits. No one is taking money out of your pocket and handing it to a cashier. No one is taking a credit card out of your wallet and swiping it at the register. I personally never had problem controlling my spending or it was never so bad that it would put me in debt but I wasn’t immune to it either.
To be honest with you a couple of years that I spent without credit cards taught me a valuable skill – LIVING WITHIN MY MEANS. I could only spend the money I had. So for some people out there who struggle with living beyond their means getting rid of credit cards for a while may be the right move to make.
In order to avoid getting into credit problems in the future, at least when it comes to credit cards, you need to pay off your credit card balance in full every statement period. Know how much you can spend and stay within that limit. Keep track of your balances by checking them at least once a week. Avoid late payments at all costs!
Best and easiest way to do that is to set up an automatic payment on each of your cards to make the required minimum monthly payment. That way even if you forget to pay the full balance you will at least have your minimum payment made and stay out of trouble.
As you can see there are no secrets, gimmicks or tricks to repairing your credit. Just plain old common sense and some patience.