Anyone who has had credit knows that it is much easier to see your credit score fall than it is to see it move up. For people who have hit a wall and need their credit to go through a repair phase, it is important to know the best ways of achieving that goal.
First, Assess Your Position
The first thing you need to do when your credit situation is in trouble is to check your credit report. You can get a free copy of your credit report from the three major credit reporting agencies – Equifax, Experian, and TransUnion – once a year.
Your credit report will have all the information about your entire credit history, and you can check to see not only where your credit problems are, but to report any errors in your credit history.
Check For Errors on Credit Score Report
It is not uncommon to find a credit report with numerous errors such as incorrect late payments entries. Credit companies also at times fail to enter payments correctly something that goes a long way in driving credit scores down. Even an incorrect address can have a significant impact on the overall score.
To rebuild credit scores fast, one must ensure that a credit score history does not contain any errors. In case of incorrect late payment entries, from current or closed accounts, one is entitled to make a claim with a credit card company to have the same rectified.
Payment history is a major factor that weighs heavily on credit scores, thus cleaning up any errors goes a long way in rebuilding credit scores quickly.
If your credit report shows you have debt problems, then it is time to take action. There are a number of immediate steps you can take to stop the situation from becoming worse.
Don’t close any of your existing credit card accounts
The reason is how creditors look at your overall credit usage. They calculate your credit utilization ratio, which is the amount of credit you have used as a percentage of the total amount of credit you have available. For example, If you have $1,000 of credit available and use $500, your credit utilization ratio is 50%.
Creditors favor borrowers who have this ratio at under 35%.
Closing a credit card account reduces the total amount of your available credit and increases your credit utilization ratio.
Using the example above, that 50% ratio would rise to 62% if you closed out an account that had a credit limit of $200. Even if you maxed out the credit limit, it still counts towards the total amount of available credit. So keep all your credit card accounts open.
Open a secured credit card
One way to control your spending and reduce your use of your credit cards is to open a secured credit card. Secured cards require you to deposit cash that will be available to you by using the card.
This type of card limits your spending because you cannot spend any more than the amount of cash that is on the card. All your purchases are “secured” by the money you have available on the card.
You can also think about this as a “limited” credit card because using it will help you avoid increasing your monthly credit cards bills.
Negotiate with your creditors
This action does not need to wait until your debt has completely stressed you out. Most creditors will be willing to work with you to keep your credit record clean and avoid moving to the debt collection process. Some may offer you a lower APR while making temporary adjustments to your monthly payments.
Others may offer to give you a month off from paying your bill provided you pick up where you left off the next month.
The truth is, the banks want to keep you as a customer because you will keep using your credit line. Working with you is good for their bottom line.
Check if You Are Linked To another Person
Low credit scores many at times come into being as a result of joint accounts. Sharing an account with a spouse, friend or a family member who does not make repayments on time can take a significant toll on one’s credit score. If this is the case, then you might consider pulling your name from the joint account as a way of ensuring that your credit score doesn’t get further bogged down.
Last Lines of Defense
So, you have tried everything and your debt situation continues to get worse. There are three basic options you can take but the third, filing for bankruptcy, to be used as a last resort.
Of the two remaining, debt consolidation and debt settlement, there are significant differences you need to be aware of.
Debt consolidation is the process where you take out a loan from a bank to pay off all your loans, then agreeing to terms with the bank to pay off that loan within a 36-month period. The debt consolidation loan interest rate is usually much lower than the rate you are paying on your credit card debt. But the loan will appear on your credit report as another credit item. This can spell trouble if not used wisely.
For example, if you have $1000 in credit card debt and take out a $1000 debt consolidation loan, your credit report will show the list of credit cards with a balance of $0 (all paid off) and the new $1000 debt consolidation loan. If you continue to use your credit cards, the amounts you charge will be added to the total debt on your credit report. So, if you spend $200 on your credit cards after getting the debt consolidation loan, you will have $1200 in debt showing up on your credit report.
The only thing above filing for bankruptcy is debt settlement. Debt settlement is NOT debt consolidation. It is a process where the company you hire to settle your debt takes all of your debt and negotiates with the individual creditors on your behalf for a reduced payment. They will give you a monthly payment plan, but that money is used to lower the amount offered to your creditors. You will lose all your credit cards and have a very difficult time getting any new credit in the future.
Learn these basic ways so you know how to get your credit score up. The most important word to remember is “patience.” Moving up on the credit score ladder is tough, even for people with good credit.
Start applying these tips now and you will find you are in better shape than you thought.