Has your credit score taken a hit because of the Great Recession? Foreclosures, unemployment and other financial struggles have hurt a lot of people's credit history. So how do you go about fixing it? Here are five ways that you can start repairing your credit score:
Organize and prioritize. Your main concern in rebuilding your credit is making sure every bill is paid on time. Sit down with your finances and find places where you can cut corners so that every bill is paid on or before the due date. Set up auto-pay for each credit card so you don't accidentally miss a payment. Your payment history is the largest percentage of your credit score, so it must be perfect going forward if you want to rebuild your credit.
Negotiate down your debt. Many lenders understand that people have financial hardships and will work with you to pay down what you owe, whether it be setting up a payment plan or cutting you a deal if you pay it all at once. Focus on your credit cards, or any other "revolving" debt. Paying off mortgages, auto loans and other "installment" debts don't do as much for your score. Make sure you ask the borrower how they will be reporting your new terms to the credit bureaus. They can report them as "Not paying as agreed," which can further hurt your score, or they can report them as "Paying as agreed," which can help your score. Don't agree to any terms that are reported as "not paying as agreed" and make sure to get everything in writing.
Don't close out accounts. It may seem like a good idea to close out your credit card accounts once you pay them off, but doing so can hurt your credit score. One of the main factors of your credit score is your "credit utilization ratio," which measures your credit limit-to-balance ratio on your credit cards. So if you can keep these accounts and manage to maintain a low balance on them, this will help show that you know how to handle your credit.
Get a secured credit card. If your credit score has taken a big hit, it might be impossible for you to be approved for any line of credit. If that's the case, look into getting a secured credit card. With secured cards, you pay an upfront deposit, which in most cases will reflect your credit limit, just in case you have issues paying off your balance. (If the deposit for the card is $300, your credit limit will likely be $300.) Make sure your secured card reports to all three of the credit bureaus (Experian, Equifax and TransUnion) every month so that you can start building your credit again. We recommend the Capital One Secured Mastercard.
Make sure any mistakes on your credit report are fixed. Check your credit report to make sure there are no mistakes or identity theft-related issues in your credit history. This also includes any negative information on your credit report that can be easily removed. Contest any negative information on your report from any company that no longer exists or has been bought by a larger company. All information on your report must be verified, and if the company isn't there to verify it, it must be removed.
The most important factor in repairing your credit score is time. It takes seven years for most negative information to be taken off your report. Only you taking control of your own credit situation can repair your score.
Jeff Hindenach started his career as a journalist for the San Jose Mercury News and the San Francisco Examiner. He is currently the Director of Content for NextAdvisor.com, a leading consumer and small business information web site. He specializes in credit monitoring, legal services and security software.