LESSONS IN HOW TO REBUILD YOUR CREDIT
How to Rebuild your Credit
Getting into credit trouble is a lot easier than getting out of it. If you have mismanaged your credit and wound up with a low credit score, you may be wondering how to rebuild credit. There are some proven ways to rebuild your credit, and here are a few of the best ones.
Check your Credit Report
The first thing you should do before starting to rebuild your credit is to check your credit report. First off, it will show you all the accounts where you have problems -- delinquencies, charge-offs, maxed-out limits -- providing you a road map on how to rebuild credit. Also, credit reports often have errors, and while most of those errors are minor, some are serious enough to affect your credit score. Major errors you should look for include current accounts listed as past due, open accounts listed as closed and vice versa. If you find any, correct them as soon as possible.
Pay off Past-due Accounts
One of the fastest ways to rebuild your credit score is to bring past-due accounts current. If you have any accounts that are getting close to heading to a collections agency, you should concentrate on those first. Also, rather than making a bunch of little payments on several overdue accounts that don't bring them out of past-due status, concentrate on accounts that you can bring current the fastest.
Pay Down your Debt
Once you get accounts current, concentrate on bringing the balance down. One of the biggest factors in your credit score is your debt ratio, which tracks the amount of debt you have relative to the amount of credit you have available. The number you should shoot for is 30 percent, meaning you want to reduce your debt level to 30 percent or less of your available credit. One good way to pay down debt quickly is to consolidate balances, but only due so if you can transfer balances and get a lower rate and better payoff terms.
Don't Close Accounts
Once you have paid off a debt, you may be tempted to close the account so you no longer have the temptation to spend, but that's actually a bad idea. Closing accounts can actually hurt your score in a couple of different ways. If you close a card, it reduces the total amount of credit available to you, which could increase your debt level high enough to affect your credit score. Also, closing an account could shorten your overall credit history and also throw off your mix of credit accounts, both of which could affect your credit score.
Continue to Use Credit Responsibly
After you've worked your way back from bad credit, you might be tempted to forgo credit cards and other forms of credit altogether so you don't have to deal with the hassle. But that's not something you should do. How to rebuild credit is by using it responsibly. If you stop using credit altogether, your credit score will be stuck where it was. Though it will improve over time as black marks fall off your credit report, you will build your score much quicker by countering the black marks with good marks from using credit responsibly. Use your credit cards sparingly and pay the balance off every month if you can. And if you need to buy a car, finance at least part of the amount. Making on-time payments on a fixed loan will help build up your score.