How to repair (and maintain) your credit
Getting and keeping good credit can be a challenge. First, you have to establish yourself. Then, you have to apply for and obtain credit.
Next, you need to use it and pay it back on a timely basis to keep your credit in good standing. It’s enough to make your head spin.
But if your good credit has taken a sudden nosedive, don’t panic; there are ways you can repair it. Let’s take a look.
6 steps to repairing your credit
The good news is that, when it comes to credit, you can fix what’s broken. Below are five ways to build a good credit score so you can enjoy the financial benefits that come with it.
Reach out to your creditors
If you’re having trouble making ends meet, contact your creditors, explain your situation, and seek their help to lower your interest rate (especially on credit cards).
Work with them on creating a modified repayment plan. If you wait until your accounts go into collections, it will be too late.
Lower your credit utilization ratio (CUR)
Your credit utilization ratio is the amount of debt you owe on each revolving credit account in relation to the total amount available. It also looks at the amount of revolving credit you owe overall compared to the total amount available.
Your CUR is one of the most important factors in your credit score, as it accounts for 30% of your overall score. The general rule of thumb is to keep your CUR at 30% or less.
So if you had a $1,000 credit line, for example, you’ll need to keep the balance at or below $300 to keep your CUR within a desirable range.
It’s important to apply this rule to each credit account as well as the total ratio of all your accounts. By doing so, you can improve your overall score.
Keep in mind that the lower your CUR is, the higher your score will be raised. So if you can get your CUR to zero, you’ll see a dramatic improvement in your credit score.
You can lower your credit utilization ratio (CUR) by:
- Paying down your debt.
- Increasing your credit limits.
- Using a personal loan to consolidate revolving debt.
Pay your bills on time
Pay at least the minimum balances on all of your bills by the time they are due. Do this for at least a year, as establishing a positive pattern will work in your favor and help increase your score.
Take it a step further by paying more than the minimum monthly amount to keep your balances down, if you’re able to. This is important because your score jumps up when your balance falls below 30% of the amount that’s due.
Become an authorized user
You can reap the benefits of someone’s full credit card history by getting added onto their account as an authorized user. And you don’t even have to use the card to get the benefits of the account.
Get a secured credit card
You can’t go back in time and reverse late payments. You can, however, start making on-time payments today. And you should since payment history is the most influential factor in your credit score.
A good place to start is by getting a secured credit card. With a secured card, you have to put down a deposit that’s generally equal to the credit limit you want.
The credit card issuer uses your deposit as a way to protect itself in case you default. You can then use the card as you would a regular credit card, and you’ll get your deposit back when you close the account.
When shopping for a secured credit card, compare the fees, interest rates, and other features and pick the one that best suits your specific needs.
Get a credit-builder loan and don’t use the money
It may seem counterproductive to take out a loan and not use the funds.
But when it comes to repairing your credit, it can be a smart strategy. You can use the loan to save money and build a positive payment history.
It works by investing the funds into a secure investment vehicle, such as a CD. Most major banks and credit unions offer them as a service to customers. Companies like Self Lender also provide similar competitive rates on credit-builder accounts.
The money you borrow will be deposited directly into the CD account and you’ll make payments on the loan each month. You’re, in essence, borrowing from yourself.
After you’ve paid off the loan, including interest, the bank will release its hold release the CD. You’ll receive earned interest plus your original deposit once the CD matures.
Your bank will report your on-time payments to the three major credit reporting agencies, thus helping you improve your credit score.
What if you can’t get a CD because your bank doesn’t offer them or you don’t qualify?
If that’s the case, you can take out a personal loan and use the funds to purchase a CD from any financial institution of your choice.
If you get your loan through an alternative lender, make sure you work with one that reports to at least one credit bureau. Only consider lenders that offer competitive rates, will work with poor-credit borrowers, and report payments to at least one credit bureau.
Get personalized loan offers in seconds to see what you qualify for.
Be proactive to keep your good credit
Monitor your credit reports
Your credit report provides an overview of your current and past credit accounts, and shows whether they are active or closed and in good standing or not.
A bad credit score may be the result of identity theft or a mistake made by the creditor or credit bureaus. That’s why it’s important to monitor your reports regularly.
If you’ve never reviewed your credit report, do so immediately and at least once every year thereafter. You get can get a free report from AnnualCreditReport.com.
As you review your report, look for errors or accounts you don’t recognize. For example, you may see accounts you’ve never opened, incorrect balances, or wrong personal information.
If you do find any errors, you can either work with the creditors and credit bureaus yourself or hire a credit repair company to do it for you.
Once the credit company sorts everything out, the errors or fraudulent accounts should disappear from your report by the next reporting cycle.
Maintain active accounts and avoid closing credit cards
Credit bureaus judge your creditworthiness on the number of accounts you have open and how well you use them. Closing a credit card, for example, will impact your overall credit score.
Why? Because it will affect two key factors that determine your score in the first place: your credit utilization ratio and length of your credit history.
So, if you can, try to avoid closing credit cards that you’ve had for a while.
Here are some additional tips to remember:
- Use your credit cards sparingly.
- Repay them as quickly as possible (preferably each month).
- Refrain from “maxing” out (reaching your credit limit).
- Pay more than the minimum payment each month.
Don’t apply for new credit
Every time you apply for new credit, a “hard inquiry” will be listed on your credit report. Your credit score will suffer if you have too many hard inquiries on your report within two years.
Avoid prepaid debit cards
Prepaid debit and credit cards usually come with high fees and interest rates. As such, you end up paying nearly double for any purchase you make with these cards.
What’s more, they don’t typically appear on your credit report. So, there isn’t much benefit to using them as they are expensive and won’t help you rebuild or maintain good credit.
Manage your budget wisely
The only way to maintain financial solvency is to know your income and your outflow. Spending beyond your means is a surefire way to get trapped in a web of debt.
Handle debt collectors immediately
According to the Fair Debt Collection Practices Act, debt collectors cannot:
- Call before 8:00 a.m. or after 9:00 p.m.
- Call you at work.
- Harass, lie, or manipulate you to try and collect a debt.
Additionally, debt collectors must stop further contact when requested to do so in writing. Your first inclination may be to avoid collectors at all cost. But it’ll be more productive and beneficial to find out who they are so you can send them a cease and desist request.
Repair your credit today
You can reap the benefits of a good credit score by following three simple steps: fix any credit history errors, pay your bills on time, and keep your credit balances low. Easy, right?
It can be. But if you want to ensure you don’t miss any steps along the way, consider working with a credit repair firm.
The right credit repair company can help you efficiently navigate the process by extensively examining your credit report to identify inaccurate information.
Then they can contact the credit reporting agencies to challenge those items—as well as any items that are unfair or unsubstantiated—and request for a correction or removal.
But remember, there are no guarantees and a legitimate company will never make a promise they may not be able to fulfill. That’s the difference between good credit repair company and a shady one.
Some key things to keep in mind when looking for a credit repair company include:
- Registered and licensed. Work with a company that is registered with the Attorney General and has a licensed legal staff.
- More than just credit repair. Reputable companies will offer more than just credit repair services. They’ll also provide credit counseling, including advice on how to rebuild and maintain good credit.
- Fulfill promises in a timely manner. Make sure that the company is doing what they promised to do in a reasonable time frame. Many non-reputable companies will be slow to act but quick to collect a monthly fee from you in the meantime.
Most reputable companies will be affiliated with one or more of the following organizations:
- Association for Financial Counseling and Planning Education (AFCPE).
- Association of Independent Consumer Credit Counseling Agencies (AICCCA).
- Better Business Bureau.
- Council on Accreditation (COA).
- International Standards Organization (ISO).
- National Association of Certified Credit Counselors (NACCC).
- National Foundation for Credit Counseling (NFCC).
So, to sum it up, work with a company that is licensed, registered, and highly-rated.
Review and compare top credit repair firms to find the right one for you.