Decades ago, through no fault of my own, I suffered a major financial catastrophe. It took me years to repair my credit and get back on my feet. Over those years I have learned several lessons. As daunting as it was, out of the ruins, I made my way back to an excellent credit score and a debt-free life. Here are 25 tips to help you take back control of your finances and repair your credit score.
Tip #1: Develop an Action Plan
Once you have your credit report and your credit score, you will be able to tell where you stand and where many of your problems lie. If you have a poor score, look for the problem area.
When developing your action plan, know where most of your credit score is coming from:
1) Payment History (35%)
Whether or not you have been a good credit risk in the past is considered the best indicator of how you will react to debt in the future. For this reason, late payments, loan defaults, unpaid taxes, bankruptcies, and other unmet debt responsibilities will count against you the most. You cannot do much about your financial past now, but starting to pay your bills on time (starting today) can help boost your credit score in the future.
2) Debt/Amounts Owed (30%)
If you have lots of current debt, it may indicate that you are stretching yourself financially thin and will have trouble paying them back in the future. If you have a lot of money owing right now, it will bring down your credit score. You can boost your credit score by paying down your debts as much as you can.
3) How long you have had credit (15%)
If you have not had credit accounts for very long, you may not have enough of a history to let lenders know whether you make a good credit risk. Not having had credit for a long time can affect your credit score. You can counter this by keeping your accounts open rather than closing them off as you pay them off.
4) New Credit/Inquiries (10%)
“Hard” inquiries will affect your credit score, whereas a “soft” inquiry usually doesn’t. A hard inquiry is a credit inquiry by a lender, like a car dealership, mortgage company, or department store. A soft inquiry is where you check your credit score.
5) Mixed Accounts/Types of Credit (10%) Lenders like to see a mix of financial responsibilities that you handle well. Having bills that you pay as well as one or two types of loans can actually improve your credit score. Having at least one credit card that you manage well can also help your credit score.
Tip #2: Pay Your Bills On Time.
It should go without saying, but the best way to improve your credit score is to pay your bills on time. Nothing shows lenders that you take debts seriously as much as a history of paying promptly. Every lender wants to be paid in full and on time.
Experts say that up to 35% of your credit score is based on your paying your bills on time. Paying your bills on time also ensures that you do not get hit with late fees and other penalties. If you have had problems making your payments on time in the past, your current credit score will reflect that. It will take some months of repaying your bills promptly to improve your credit score, but the effort will be well worth it when your credit risk rating rebounds,
Tip #3: Avoid Excessive Credit
If you have many lines of credit or several significant debts, you are a credit risk because you are close to “overextending your credit.” You may be taking on more debt than you can comfortably pay off. Even if you are making payments regularly on existing bills, lenders know that you will have a harder time paying off your bills if your debt load grows too much. Lenders (and credit bureaus who calculate your credit score) know that the more debt you have, the more of a credit risk you become.
Avoid taking out excessive credit. You should stick to one or two credit cards and one or two other significant debts (car loan, mortgage) to have the best credit rating. Do not apply for every new credit line or credit card “just in case.” Borrow only when you need it and make sure to make payments on time. Taking out lots of new credit accounts in a relatively short period will cause your credit score to nosedive because it will look as though you are financially irresponsible.
Tip #4: Have a Range of Credit Types
The types of credit you have are a factor in calculating your credit score. In general, lenders like to see that you can handle a range of credit types. There are installment types of credit such as your mortgage and auto loans. These are paid over a specific term and are a predetermined amount. The second type is a consumer loan based on a percentage of the amount borrowed, like your credit card.
Tip #5: Handling Collection Agencies
If you have bad credit, you will have to deal with collection agencies sooner or later. These companies often present a persistent and unpleasant problem for those with bad credit. If you owe your credit card company a payment that has not been made in some time, the credit card company will eventually hire a collection agency to recover the debt. Some collection agencies will threaten or harass you to extract a payment. To prevent the stress that collection agencies can cause, learn to deal with them.
Get the full name of whomever you speak with at the agency. Be honest about your ability to repay and try to work out a payment schedule or payment option. If at any point you feel threatened or harassed, say so. Hang up the phone if the collection agent persists. Note that the collection agency the creditor has hired has been abusive and ask to resolve the issue with someone at the company directly. Report the abusive agency and the agent you spoke with to the Better Business Bureau. Refuse further calls from the collection agency and continue your communication with the creditor directly. Keep track of each time the collection company contacts you with harassing or abusive calls.
Some collection agencies will try to use your credit score against you, telling you that they can ruin your credit score. They cannot. Your credit score is instantly affected when you fail to make a payment or reported to a collection agency, but there is nothing that the collection agency employee can do to make your credit score worse.
Tip #6: Keep Your Credit Score Safe
Some low scores are caused by a small financial mistake or oversight made in the past. Not every person with bad credit has a low credit score caused by something they did. Sometimes, other people’s criminal activity can affect your credit score. Beware of identity theft! Freeze and unfreeze your accounts as needed through the credit bureaus. Keep in mind; even credit bureaus can be hacked like the July 2017 Equifax hack.
Check your credit score regularly. You are more likely to notice problems and inconsistencies if you check your credit score on a regular basis. Check at least once a year, preferably three times a year. Check your credit rating with each credit bureau. If you notice anything odd or anything you do not recognize (such as a charge account you did not open) report it immediately. Sometimes, errors are made mistakenly by the credit bureau, but they could also be an indication that someone is using your identity. In either case, such mistakes could hurt your credit score. Fixing such errors improves your credit score.
Tip #7: Pay Down Your Debts
Paying down your debts to a minimum will help elevate your credit score. For example, if you have a $1000 limit on your credit card and you regularly carry a balance of $900, you will be a less attractive to lenders than someone who has the same credit card but carries a smaller balance of $100 or so. If you are serious about improving your credit score, start with the smallest debt you have and pay it down. Make sure that you use no more than 50% of your credit. Don’t carry a balance over $2500 if you have a $5000 credit limit. Make more substantial payments when you can afford it. The goal is not to carry any balance. Don’t spend what you do not have.
Tip #8: Reduce Credit Limits
If your credit risk rating is poor, and especially if it has taken a beating lately due to non-payments or other problems, you can ask that your bank reduce the credit limits on your credit cards, credit lines, and other debts.
Tip #9: Beware of Debts and Credit You Do Not Use
It is easy today to apply for a store credit card and forget all about in three years, but that account will remain on your credit report and affect your credit score as long as it is open. Having credit lines and credit cards you do not need makes you seem like a poor credit risk because you run the risk of “overextending” your credit.
Tip #10: Be Careful of Inquiries on Your Credit Report.
Every time that someone looks at your credit report, the inquiry is noted. If you have lots of inquiries on your report, it may appear that you are shopping for several loans at once or that you have been rejected by lenders. Both make you appear to be a poor credit risk and may affect your credit score. Be careful about who looks at your credit report. If you are shopping for a loan, shop around within a short period, since inquiries made within a few days of each other will be lumped together and counted as one inquiry.
Tip #11: Be Careful of Online Loan Rate Comparisons
Online loan rate quotes are easy to get, type in some personal information, and you can get a quote on your car loan, personal loan, student loan, or mortgage in seconds. This is free and convenient, leading many people to compare several companies at once to make sure that they get the best deal possible.
The problem is that since online quotes are a relatively recent phenomenon, credit bureaus count each such quote estimate as an “inquiry.” If you compare too many companies online by asking for quotes, your credit score will fall due to too many “inquiries.” Research companies and narrow down possible lenders to just a few before making inquiries. This will help ensure that the number of inquiries on your credit report is small and your credit rating will stay in good shape.
Tip #12: Know Who is Looking at Your Credit Report and Why
Too many inquiries look bad on your credit report, but more than that you likely want to know who can see your personal financial information, now that you know that your personal information is stored in a credit report. If you sign a document with a lender or apply for credit online, you can be sure that someone is looking at your credit report. However, you may want to look over other documents to see who is taking a peek. Insurance agents will often look at your credit report, for example. Some landlords and potential employers will too. Be wary of online sources, too. When you provide someone with your social insurance number, you may be permitting them to look at your credit report. You should not bar people from looking, but knowing who is looking is a good financial practice.
Tip #13: Take Out Credit and Repay it Quickly
If you have terrible credit following a bankruptcy or other major financial upheaval, you may need to get back into a good credit rating by taking out a loan you can handle. Make an appointment to see your bank and arrange for a small loan. You should have enough savings to pay for the loan before you do this. Pay back the loan quickly. It will not boost your credit score a huge amount, but it will show lenders that you are having an easier time paying your bills. Taking out a small loan you can repay is part of the slow process of reestablishing good credit following a big financial issue.
Tip #14: Try Secured Credit
Secured credit is credit or a loan which uses something as collateral. In some cases, this could be an asset like a house. In other cases, the collateral may be money frozen in an account by the bank for a purchase. It is easier to qualify for secure credit. You may have to pay slightly higher interest if your credit score is quite low, but in the long term repaying this type of loan can improve your credit score.
Tip #15: Learn From Your Mistakes.
Everyone makes some credit mistakes sooner or later. It is very rare for someone to go through his or her entire life without making a few dings on his or her credit record. Don’t beat yourself up over your mistakes. Learn from your mistakes. Do you develop credit problems because you overspend while shopping? Are you so disorganized that you forget to pay bills? Are your bills just too large for your current income? Do you routinely get overcharged for things and fail to notice until much later? Knowing what your mistakes are and finding solutions to the problems can go a long way towards helping you develop a good credit risk rating.
Tip #16: Seek Professional Help
If you are in over your head, and your credit is so bad that you cannot get a loan or may even be facing bankruptcy, you may want to seek help from a professional. Some financial professionals can help you with credit repair.
Bankruptcy lawyers and bankruptcy advisors: Bankruptcy lawyers can help represent you in bankruptcy proceedings. Advisors can help you decide whether to apply for bankruptcy and how to proceed once you do decide to file. While getting a bankruptcy lawyer and filing for bankruptcy can be upsetting and dramatically affect your credit score for many years, it can also give you a chance to start over financially and help you reestablish good credit again in the long run.
Credit repair companies and credit counseling companies: These companies can help you by acting on your behalf or advising you on what you can do to repay your bills quicker. They also guide you to make better financial decisions.
Accountants and tax services: Accountants and tax filing services can help you make the most of your money by making sure that you do not end up overspending on taxes.
Bankers: Most banks today want to not only help you keep your money but are willing to work with you to make the most of it. As a banking service, many banks today offer free investing and saving advice. Personalized meetings with bank officers that can help you figure out your money situation.
Tip #17: Keep Your Records Up to Date
Not knowing what is going on in your own financial life is courting disaster. Keep one file folder in your home which contains your financial information and review this periodically. If something changes in your life (you get married, you start a family, you move or change jobs) look through your financial folder and contact everyone to update them on the change. If you move and forget to inform all your creditors of your new address, you may not get all your bills, making you look like a deadbeat debtor.
Tip #18: Stay Financially Organized
Keep all your financial records, including tax records, in one place. Note the days you paid your bills on the bills themselves. All of your financial records in one place makes it easier for you to track where your finances need work.
Some of the information you may want to keep in your financial file includes:
- Tax receipts and forms
- Your credit reports and scores
- A list of financial contacts (your bank, credit agencies, investment agents)
- Your written emergency plan, detailing what you should do in case of a sudden loss of job or death
- Banking information
- Financial forms
- Investment information
- Deeds to your assets (like your house)
- Loan agreements
- Insurance forms
You may want to buy a box and keep your separate information in different labeled folders (tax information in one and bills in another) for easy referencing.
Credit repair is not one magical solution but lots of relatively small things. To make sure that you do not overlook any one thing, you may want to develop a to-do list that you can post and check off. List credit accounts you need to close, or accounts you need to pay down. As you tick off each item, you will get a sense of accomplishment knowing that you are taking steps to improve your finances. Keeping a credit repair checklist posted will also keep you on track.
Tip #19: Learn to Budget
One of the biggest reasons that people develop poor credit is overspending. In many cases, this overspending is caused by a lack of budgeting. Contrary to popular belief, a budget does not have to be constricting, tedious or complicated. Simply note how much you earn each month. On a piece of paper write down how much you need to spend on savings, rent, utilities, food, personal care, transportation, spending money, entertainment, hobbies, education, and other items. Make sure you account for every expense. Commit yourself to spending that particular amount on each item on your list. Of course, some expenses on your list will change each month, you may spend more on heating in the winter than in the summer, for example, but estimating can help ensure that you can meet all your financial responsibilities.
Most people are surprised by how quickly their money is spent. Impulse spending and small-change spending adds up. We often spend without thinking about it, buying a coffee or a newspaper we do not need. Budgeting helps you channel as much money as you can into savings and debt repayment so that you can repair your credit.
Tip #20: Automate Your Finances
Thanks to automatic bank payments, you can have your bills taken out of your checking account each month. If you are the sort of person who gets dings on their credit report because you can never remember to pay your bills on time, this can be a beneficial service. You can even set up email service to send you automatic reminders of when bills are due. Banking automation is one of the nicer things about high-tech living. It can help you keep your credit score clean if your credit score suffers mainly from your forgetfulness or disorganization.
Tip #21: Get Overdraft Protection,
Talk to your bank and lenders about services they offer to keep you safe. Overdraft protection is a service that often costs nothing and protects you in case you withdraw too much money from your bank account. With overdraft protection, you do not get a “ding” on your credit report or a charge for insufficient funds. In most cases, you get a day or two to repay the overdrafted money. Some credit cards and other loans offer a similar service or insurance in case you lose your job and are unable to make a payment for a few months.
Tip #22: Live Within Your Means
Many people believe that if they had more money, they would not have to worry about credit. In fact, that is not true. Many people who have money, or at least have all the trappings of money, including cars and nice homes, in fact, have terrible credit. It is not your income that decides whether you are a good credit risk or not, but rather how you handle money. You could be earning $10 per hour and still meet your financial responsibilities (which will result in terrific credit). You could also be earning $300,000 a year and be in terrible financial shape because of unpaid bills and excessive debt. The best way to ensure that you have a good credit rating is to spend less than you earn. Live within your means. If you have a minimal income, you may need to live with roommates to keep costs down. If you have a moderate income, it may mean saving more and entertaining less. Your income is not a factor in determining your credit score. Although your past and current employers are listed on your credit report and lenders may be able to guess your financial status from your loan amounts, your income doesn’t count.
Tip #23: Save
One of the best ways to ensure that your credit rating stays in good shape is to save money each month. Saving ten percent of your income is a reasonable goal. Whether you can save $25 a month or $200, saving and investing your savings will prepare you for financial emergencies (like an illness or a job loss), and it will train you to stop overspending. You can use your savings to make that your debts never get overwhelming. It may even allow you to build up your retirement portfolio.
Tip #24: Avoid Payday Loans
Payday loans (cash advance loans) are small, short-term loans that carry a very high-interest rate. Some companies advertise them as loans to help you repair your credit, but this is misleading. Some even suggest that these loans can help you pay off your bills and establish good credit, but if you cannot afford to pay your payday loans on time, you have to “roll-over” or extend the loan, often at an enormous expense and high-interest rate. It is easy to get stuck into a payday loans cycle, whereby much of your monthly paycheck goes towards paying off the ever-growing payday loan. Several states are investigating payday loans for possible illegal activity stemming from usury laws. If you cannot afford your bills one month, you are much better off trying to arrange an alternate schedule of payment with the companies you owe money to rather than risking your credit rating through payday loans.
Tip #25: Do Not Use One Debt to Repay Another
If you use one credit card to pay off another, you are paying interest on interest. Paying off the new credit card bill will be even more difficult. It makes more sense to get a second job or arrange for a new payment schedule. Paying off your debts with another debt may help you in the short run, (you will not have a late payment on your credit record), but ultimately the larger debt load will make maintaining good credit, hard. The only exception to this rule is debt consolidation, in which all your bills are paid by one lender, who then becomes the only creditor to which you owe money.
Many people think that paying off debts will improve their credit score suddenly. Unfortunately, it is not true. If you have experienced a bankruptcy, the damage will remain on your credit report for seven to ten years. Even if your credit problems stem from not paying bills on time, it will take time. Paying off your debts and resolving problems will help your credit score (since overdue accounts will be marked as “paid” on your credit report), but only time will repair your record entirely. If you have faced a major setback, such as a bankruptcy, you may have to wait to get the best interest rates on more significant purchases. If you plan on making a major purchase (such as a house or car) that may require a loan, you should start working on improving your credit now. Otherwise, you will not have enough time to radically improve your credit score. Even if your credit score is already reasonably good, you may need to give yourself several months of time to boost your credit rating to get the best loan rates.
Don’t wait to work on repairing your credit. Take heart, persistence and good financial habits will get you get back on your feet! If I can make a comeback, so can you!
How have you recovered from a financial set back? Do you have any tips? Please comment below, I would love to hear your success story!
If you enjoyed this post please give me a “like” and follow me.