RiverTrace Blog

A Quick Guide For Rebuilding Credit

Posted on: May 20th, 2017 in Financial Education

Creditors are reluctant to extend credit to new borrowers because they don't know whether they'll repay.  On the other hand, creditors are even more reluctant to lend to borrowers with poor credit histories because they believe they won't repay.

That's why it usually takes longer to rebuild credit than to start building credit.  The time it takes to recover from a poor credit history depends on how big your mistakes are.  Your credit report will show late and missed payments, collections, and judgments for seven years.  Bankruptcies remain for up to ten years.

The good news is that you can begin repairing your credit history and credit score immediately.  Let's look at several strategies you can use to rebuild your credit.

Check your credit reports

Your credit report shows the facts about your past use of credit, such as missed and late payments and how much you currently owe.  The information in your credit report is used to calculate your credit score which lenders use to determine the likelihood you'll repay what you borrow.

Since the information in your credit report is used to calculate your credit score, it's important to check your credit reports and make sure the information is accurate.  In addition, verify that debt that is too old to be reportable is not showing on your credit report.

For example, a missed payment from more than seven years ago should no longer appear. Each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) is required to give you a free credit report every year.

About 20% of Americans have an error on at least one of their credit reports, so be sure to check all three. If you see an error, dispute it.  Gather documentation to make your case, such as a canceled check used as payment, and highlight the credit report items you're disputing.

Visit the websites of the credit bureaus that have the incorrect information, and follow their online dispute process.  You can also send a dispute letter to the address on the credit report.

Pay existing debt on time

If you have existing credit accounts that lenders haven't closed because of nonpayment, you can easily start rebuilding your credit with them:  Pay your monthly bill on time.

Your history of on-time payments is the biggest single factor that affects your credit score. A missing payment is damaging when you're trying to rebuild credit.  Schedule automatic payments with your creditors if your problem is forgetfulness and disorganization.

Bring existing debts that have gone to collections current. If you have multiple accounts in collections, you might not have the money to make them all current at the same time. Prioritize and repay the ones that are still in relatively good standing first.

Keep balances low

Another big factor that affects your credit score is how much of your available credit you use.  This is known as credit utilization, which is a measure of how much you owe on your credit cards and lines compared to the accounts' limits. Your goal is to use 30% or less of your available credit.  Using more than that lowers your credit score.

Get a secured credit card

If your creditors closed your credit card accounts, one option for rebuilding your credit is a secured credit card.  A secured credit card uses a cash deposit as collateral.  The deposit is usually equal to 30% of your credit limit.  However, the card issuer may require a higher deposit and set your limit lower if you have really poor credit.

Secured credit cards usually work the same as other credit cards.  You can charge up to your credit limit, and you must make at least the required minimum payment every month.  If you fail to make your payment, then the credit card issuer takes it from the amount on deposit.  Try not to use more than 30% of your credit limit.

Shop around for the best card and make sure the issuer reports to all three of the major credit bureaus. Also be sure that the issuer allows cardholders that handle their accounts well to graduate to an unsecured card.  When you upgrade to an unsecured card or close your secured credit card account, the issuer will return your deposit.

Get a credit-builder loan

Credit-builder loans are usually offered by credit unions or community banks to help you improve your credit.  The money you borrow is deposited into a savings account, and you cannot use the money until you repay the loan in full.  At that time, the financial institution will send a good report to the credit bureaus.

According to a 2013 study, borrowers with six months of on-time payments for credit-builder loans had an average credit score improvement of 35 points.  Some of the borrowers had loans as small as $100.  Keep in mind that financial institutions will report missed payments that will further damage your credit history and score.

Become an authorized user

Another way to help rebuild your credit is to become an authorized user on someone else's credit card.  Being an authorized user means you'll receive a card with your name on it that you can use to make purchases.  However, you're not legally responsible to repay the account.

What you pay or don't pay is between you and the primary account holder.  To ease the minds of primary cardholders, some credit cards allow them to set spending limits for authorized users.

Since you're not legally obligated to repay the debt, being an authorized user doesn't have a big impact on your credit score.  How it helps depends on the longevity of the account because the overall age of your credit accounts is one factor used in calculating your credit score.

Keep in mind that being an authorized user can hurt your credit history and score if the primary account holder fails to pay the bill.  So, be sure to ask someone with good credit habits if you can be an authorized user on their account.

Get a co-signer

If you're credit history is so poor that you're unable to get approval for another credit account, a family member or friend with good credit can co-sign a loan or credit card with you.  A co-signer takes on equal responsibility for repaying the loan or credit card, and is putting his or her credit history on the line for you.

Only use this option if you're certain you can repay the account on-time.  A missed or late payment will affect the co-signer's credit rating as well as yours.

We've explored several options for rebuilding your credit.  Take the first step by obtaining your free credit reports.  Ensure the information is accurate and then decide on which of the rebuilding strategies work best for you.  Develop your plan and put it into action.  Remember that rebuilding your credit doesn't happen overnight, but it will be well worth it in the long run.
To learn more about options to rebuild your credit, contact us online or call us at 804-266-2767.

If you need to contact us about a news item, event, or just want to give us a shout, please don't hesitate to get in touch with us by calling 804-266-2767 or emailing us.

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