Rebuilding Credit: The Basics

Since I’m in the process of rebuilding my credit, I thought I’d walk you through some of the steps I’m taking to meet my credit goals.

Please understand that there is no “quick fix” for your credit. Your credit report is created based on your use of money, whether responsibly or irresponsibly. You can, however, put in extra effort by disputing incorrect or out-of-date items on your report, paying off debts, and acquiring one or two new trade lines where you may be lacking. To the rest, I’ll say, “Time heals all wounds.”

My Credit History

Historically, I’ve had dismal credit, but I was able to build it back up to excellent credit with a credit score of over 750. Realistically, I see myself doing that again, because I know it just takes a little time and organization, and I’m not starting from the bottom. My scores range from poor to fair, so I have a bit of a head start.

In the last 5 years or so, I’ve had some derogatory marks added to my reports. I’ve also not had any credit cards, BUT I also have no debts (which is good and bad). This is a big reason my credit is lacking, because this affects my “credit history”, which is an important factor in deciding my credit score, but there are deciding factors. According to FICO, these are the top 5 to consider, in order of importance:

  • (35%) Payment History – Paying your accounts on time (collections, late payments, etc.).
  • (30%) Amount Owed – Combines debt, credit utilization, and number of accounts.
  • (15%) Credit History – Age of accounts and how often you use them.
  • (10%) Credit Mix – Types of accounts (installment, revolving, mortgage, etc)
  • (10%) New Credit – Don’t open too many accounts in a short amount of time.

These topics cover many more details that you can find on the Fico website, but essentially, they will be the most important to you. I would like to add that too many hard inquiries may have a mild negative impact, and public records may have a significant negative affect on your credit score. Public records include liens, judgment, and bankruptcies.

Where to Start When Rebuilding

The first thing you’ll want to do is get your hands on all three of your credit reports and scores, if you don’t already have current copies. You can get all three reports (no scores) through for free, every 12 months, or you can order them directly through the credit bureaus’ websites. Experian offers all three reports with scores for $39.95.

DEBTS: If you have unpaid balances, charge-offs, and/or are in collections, this will continue to be a derogatory mark on your credit report. This is absolutely step #1 in improving credit. ALL DEBTS MUST BE PAID. If they’re not, stop here, and get a plan together today. You’re in the perfect place to do so – use the search box on this site!

Once you have your reports, look over them for inaccuracies. If you find that you may need to dispute inaccuracies or out-dated information, please see my post on “How to Dispute”. This is the first thing you want to do – clean it up and make sure everything is accurate and updated. The information reported will vary from one credit report to the next, so be thorough.

Next, you’ll want to set some credit goals, and to do that, you need to locate the part of your report that talks about why your score is low. It will usually be titled something like “understanding your score” or “factors affecting your score”. This will let you know what is hurting your credit and what you can do to improve it. Some things will not be able to change. For example, one of mine is “insufficient information on a mortgage account”, which I can’t do anything about since it’s an old (and closed) account. A different bureau has no items to display for me to improve on, which sounds great, but leaves me feeling lost with a mediocre score. What this tells me is there is nothing hurting my score, but I definitely need to still build up my credit responsibly. <— my new goal!

New Revolving Credit Tradelines

Once any disputes are completed to your satisfaction and you have your goals in mind, it’s time to take action. For me, since having no revolving credit was hurting me, I decided to get a secured card through Discover for $500 and only use it at a 10-15% debt-to-credit ratio, meaning I never charge more than $50-$75 on it each month, and pay it off completely and on time. After six months, I can be reevaluated for a larger credit line. After one year, I may qualify for an unsecured card with them based on my payment history. This is a great way to be smart about revolving credit while giving your credit score a lift!

And, I did a lot of research before choosing Discover to help build my credit. Not only are there the above-mentioned features, but I also earn 1% cash back and get to view my FICO score for free through their partnership with TransUnion. It’s a win-win for all involved.

Whatever you do, don’t apply for multiple revolving accounts in a short period of time, as this appears as though you need credit. I only applied for one secured card and will wait 6 months before considering any other revolving accounts. Generally speaking, new accounts may temporarily show negatively on your credit report until around 90 days of on-time payments.

Installment Loans

I was already in the market for a “new” used car for my oldest daughter, and it occurred to me that this may be an opportunity to help build my credit by financing. At first, I was concerned that my credit may not allow the financing, but I soon learned that “fair” scores are considered “good” in a card dealership.

I got a 7.24% interest rate, which isn’t awful, but that’s not really the point. The point is the bank will make a little money off of me, and in return, I will use them to build up my credit. Another win-win!

I didn’t want to be in debt with this purchase or pay massive interest, so I saved up the money in advance and put it in a separate savings account. I put a nice  down payment on it (banks like to know you have cash to put down), and was able to finance the rest over 48 months. Of course, I’ll be paying it off in less than a year without penalty, but don’t tell the financing company!

The Bottom Line

I don’t believe credit is essential to life, but it’s definitely essential to qualifying for a mortgage. Most other things you can reasonably save up for, even a used car. Only buy what you can truly afford, even if you finance it, and pay on time, every time.

Everyone makes mistakes, even with credit, or especially with credit, but it can be re over time, and with a little patience and forethought.

I will post my credit scores and any changes in them over the next few months. I’ve already seen a 41 point increase in my Equifax score in the last month, but I think that’s only the beginning.

If you are beginning to, or in the middle of, improving your credit, post more about your story and goals in the comments below. You can help others and get expert feedback on many related issues you may have.

This article by Consumer Recovery Network first appeared here and was distributed by the Personal Finance Syndication Network.