7 Proven Ways to Rebuild Your Bad Credit Rating
If you suffer from poor credit it can have a huge impact on your life. If you end up with a poor credit rating, banks will make your life difficult with higher requirements for loans and poorer interest rates. In addition to your banking life, it can also make renting a nightmare. Most landlords run credit checks on their new tenants, which means that you are going to get left with the rentals that nobody else wants.
Bad credit can create a snowball effect that can impact all areas of your life, and make it difficult to pull yourself out of the situation. Fortunately, just because you have bad credit today, doesn’t mean it has to stay that way. There are many things you can do to help improve your credit rating.
In order to rebuild your credit rating effectively, you will need to be financially secure. If you are constantly living day to day and paycheck to paycheck, you will continually find yourself missing payments. It is important for you to take responsibility for your bills and make an effort to pay them on time. Otherwise, what is the point of fixing your credit if you simply mess it up again by not paying your bills on time?
Here are the 10 most effective ways to build up your credit again.
1. Review Your Credit Report Online
Before you attempt to improve your credit rating, the first thing you need to do is take a deep look at your credit reports online. The three credit bureaus are required to give you a free copy of your credit report every year. This means that you need to contact either Equifax, Transunion, or Experian and ask for your credit report.
A word of caution. I paid for a credit report in the past (I will not disclose which agency) and found out two years later I was somehow paying a monthly subscription for $15 per month. This service was snuck into the one time fee, and I didn’t realize it until I had inadvertently given them hundreds of dollars out of my pocket. Be careful when signing up to any credit reporting agency and handing them your credit card.
As you look over your credit report, make sure you scour the documents to see if there are any outstanding fines that you were charged. I once had a credit mark against my account because of an old phone plan that I canceled, but the company never closed the account. They kept on billing me, and I found out later through the credit report that they had sent my bills to collections. This is one of the many things you will find when you take a deep look at your credit report.
2. Contact Your Creditors Directly
Once you have a copy of your credit report and see all the marks against your account, you can then make direct contact with each creditor. If you missed a few credit card payments for example, but have a previous history of always paying off your credit card, some creditors will be lenient and have the strike removed against you.
If you don’t want to deal with the creditors directly, you can use a service like Credit Karma to contact your creditors for you.
Contacting creditors works great when you have a long history with them. Institutions like your bank, cell phone provider or utility company are more likely to be lenient if you have a good track record with them. Creditors have the power to have entries removed from your credit report if they contact the bureau and remove the claim. This means that they can erase that missed payment if your account is currently in good standing.
Besides asking your creditors to remove the entry, you should also contact them about paying off any current balance that you owe. Often, creditors will be willing to settle the amount owed for a lesser amount. Say you owe a creditor ten thousand dollars, but you can’t pay it off. You can try to renegotiate that debt to a more reasonable amount that you can afford to pay off. They might let you only pay off five thousand dollars and wipe the rest of the debt off.
3. Dispute All Inacurracies (and others)
One method that credit repair agencies do to help repair credit is to try to dispute everything you can on the credit report. When you make a dispute on your credit report, the creditor is asked to verify their claim is accurate. This will require the creditor or collection agency to verify the information.
If there are any inaccuracies on the credit report, you should show proof or documents that you have to prove your case. In some cases, even if the report is accurate, disputing will force the creditor to respond with proof. While bigger creditors and collection agencies will respond, you might find that smaller businesses do not respond to every dispute. If there is no response to a dispute you automatically win the claim.
This is a method that you can use to try to reduce some of the negative marks against your credit history, however, don’t expect it to wipe everything clean. Any larger debts will most certainly be followed up by your creditors.
4. Get a Secured Credit Card
If you have bad credit it can be impossible to get a new credit card. Credit card companies are not likely to approve someone who has a history of defaulting on their debt. The best way to get yourself back in the credit game is to apply for a secured credit card. These secured cards, are basically like debit cards, except you have to pay them off every month.
The purpose of secured credit cards is to ensure that the bank doesn’t suffer any losses if you fail to pay off your credit card. If you end up skipping a few payments and the bank cancels your card, they will take the money you used to secure that card as payment.
If you need help getting a secured credit card make sure you read our article on the Best Secured Credit Cards
The biggest advantage of a secured credit card is it can help you slowly rebuild your credit history by showing that you make payments on time and pay off your card every month.
5. Increase Credit Limits
After you have opened up a secure credit card you can see if the bank will increase your credit limit every six months. The more credit that you have available, the better it is for your credit rating, especially if you keep a low balance on your credit. If you happen to increase your credit limit and end up using every last bit of it monthly, your credit to debt ratio will be worse.
If you have existing credit cards that aren’t secured, you can do the same thing. See if you are able to increase the limit on your credit card whenever you can. This will allow you to build up your credit limit which will benefit you in the future.
Keep in mind that you don’t want to open up too many credit cards at once. I have been denied a credit card before simply because I applied for a few credit cards that month from other banks. So if you plan on increasing your credit limits and getting more credit cards, do it gradually and don’t try to rush everything at once.
6. Pay Your Bills on TIME
This last step is the most important part of improving your credit rating. Nothing will hurt your report more than a history of late payments on your credit report. If you do all the previous steps and forget to pay your bills, it will erase any progress that you make.
The best way to pay your bills is to set up an automatic payment system in your bank so that recurring bills like your phone and utilities get paid automatically from your bank account. This will reduce the human error of forgetting to pay your bills, which all of us have done from time to time. Paying your bills on TIME is everything.
Assign a day at the end of the month where you go over all of your bills and pay everything off. This will help you create a habit of paying your bills in a timely fashion. Once you get used to paying your bills on time, missing your payment by a day will give you dread.
7. Be Patient
While you can destroy your credit history with a few bad moves, unfortunately, rebuilding your credit history takes time. Sometimes, time is the most important ingredient in improving your credit history.
My barber told me a story of how he ended up defaulting on his truck payments because he lost his job. He would park his car in different locations around his house, to prevent the repo guys from taking the truck. After six months of constantly hiding, he ended up contacting the collections and letting them repossess his truck.
When he told me the story, I asked him how it affected his credit rating. He said that he went bankrupt to clear out all of his debts that he couldn’t repay, but destroyed his credit in the process. After going bankrupt, he had to pay everything off in cash and didn’t have access to credit cards for a few years. However, he told me that after 7 years he had fixed his credit and was in good standing.
So as you can see from my barber, just because you have bad credit and things look terrible right now, doesn’t mean they will always be this bad. If he could get bankrupt and then turn into a successful businessman opening up several barbershops in Los Angeles, I think it is possible for anyone to turn their credit around.
Learning from the Past
One of the most important things you have to ask yourself during the credit repair process is how did this situation happen? Did you forget to pay a bill, that ended up snowballing into something much bigger? Did you end up taking on too much debt, and found yourself underwater with the number of bills you had to pay?
Perhaps you need to set more limits on the amount of credit that you take on in the future. Instead of having 3-5 credit cards, where it becomes difficult to track your bills, try reducing the number to 2-3 cards. Figure out a system so it makes it easier for you to keep track of your income and your outgoing expenses.
For some people losing a job, a medical emergency, or a tragic event can lead them to spiraling debt and credits that get out of control. Obviously, these situations are not your fault. Most successful people have fallen on hard times in the past. Just because you are in a difficult situation right now, doesn’t mean that you won’t work your way out of it in the future. As long as you are willing to put in the work, you will be able to repair your credit and get back on your feet. Just stay patient.
If you have a long and varied credit history, then how you smashed up your credit history will matter more. If you have a long credit history and you have ruined your FICO score, then you need to read these articles after you read this one:
- How Long Does It Take to Repair Your Credit? Part One – Factors That Increase Credit Repair Times
- How Long Does It Take to Repair Your Credit? Part Two – Your Acceptance Of Responsibility For Your Spending And Your Income
- How Long Does It Take To Repair Your Credit? Part Three – Factors That Shorten Credit Repair Times
- How Long Does It Take to Repair Your Credit? Part Four – Risky Things You Can Do To Speed Up Your Credit Repair