It doesn’t take much to damage a good credit score. A missed payment here, a late payment there, and before you know it, your score has dropped below 600 and into dangerous territory. Once your score drops, you’ll find that loans are more difficult to acquire, while your interest rates go up. What’s more, you may have to pay more for insurance – and you might not be able to rent that great apartment you wanted. Plus, many employers check credit scores as part of the vetting process when hiring new employees. In short, a low credit score can really affect your life.
It can be a difficult road, but rebuilding your credit score is definitely worth the effort – often, the hardest part is just getting started. Fortunately, there are a number of tips to help you on your way.
How Your Credit Score Can Crash
Two of life’s most stressful occurrences – divorce and bankruptcy – can wreak havoc on your credit score. Divorce can leave you feeling devastated emotionally, but it can also leave you with debts that linger long after the trauma of the legal battle is over. During a divorce, it’s important to be sure that your divorce decree separates all debts as to who is responsible for paying them. Close any joint accounts that are paid off, and double-check by ordering a free copy of your credit report so that you can see what debts and accounts bear your name.
The decision to go through bankruptcy is likewise a painful experience that can level a blow to your credit score. However, the effect is temporary, and with consistent effort you can rebuild your score to a stellar rating. As long as the bankruptcy is listed on your credit report, your credit score will suffer. If your score was high – say, around 750 – a bankruptcy is likely to make it plunge by 100 points.
There are three types of bankruptcy:
All of the individual accounts that you owed when you filed for bankruptcy are supposed to be removed from your report after seven years. Check your credit report and make sure that your bankruptcy is removed as soon as it is eligible to be purged.
Steps to Rebuilding Your Credit Score
1. Open a Bank Account
For those who have bad credit, opening a bank account may be easier said than done. You may have to check around, but there are banks (such as Wells Fargo) that offer “opportunity” accounts to those who have bad credit. Just be prepared to live with limited services and higher fees until you are able to rebuild your credit.
You should also check with your local banks and credit unions, as they are more likely to be willing to work with you. You can find a credit union near you by going to the National Credit Union Administration (NCUA) website.
2. Get a Secured Credit Card
Obtain a secured credit card by using your bank account as collateral. With a secured card you can charge up to the amount in your bank account. Avoid cards that charge an application fee, and look for cards with low annual fees. Also, make sure to choose a card that will be reported on your credit report, and, if possible, select a card that will convert to an unsecured card after one year of making on-time payments.
3. Obtain an Installment Loan
After working with your bank or credit union for several months and proving that you are a good customer, you may be able to convince them to extend an installment loan to you. Keep it small – less than $1,000, if possible.
The purpose of the loan is not so much to make a purchase as it is to give you another opportunity to show how responsible you are about paying your debts. Keep the loan amount and the payment amounts small enough so that you are sure to be successful in making all payments on time. This is the time to show that you can make regular payments. The best way to do that is to set up automatic payments through your online banking system.
4. Pay Your Student Loans
If you owe money on your student loans, then make paying them a priority. These loans follow you throughout your life, and they cannot be discharged through bankruptcy. Once you are in repayment mode, student loans will appear on your credit report. Any missed or late payments will derail your efforts at rebuilding your credit score.
5. Become an Authorized User
You may be able to rebuild your credit by leveraging the good credit of a friend or relative and becoming an authorized user on their credit card. They must contact their credit card company and have you added to their account. That credit card will appear on your credit report, and your score will benefit from your friend’s good payment record.
As an authorized user, you’re entitled to a card too – but if you value the friendship, it’s a good idea to decline and not use the credit card at all.
6. Avoid Prepaid Cards
Stay away from prepaid debit and credit cards, as they charge fees and high interest rates. Offered by large companies such as Green Dot, Walmart, and NetSpend, they come emblazoned with the Visa or MasterCard logo – but don’t be fooled. You end up paying almost double for any purchases you charge with cards such as these. Furthermore, they don’t typically show up on your credit report, so there is no real benefit to using them.
7. Improve Your Habits
It’s time to turn over a new leaf and correct the behaviors that crashed your credit score. Be sure to do the following:
- Only keep a couple of credit cards in your possession.
- Shred and discard credit card applications that come in the mail.
- Don’t max out your credit cards.
- Only charge a maximum of 10% of your credit line.
- Pay off your card balance in full each month.
- Never, ever miss a payment.
If you feel that you need more support in your efforts to reform, contact your local Consumer Credit Counseling Service office. This nonprofit organization provides free and low-cost assistance to those in need.
Will it be easy to rebuild your credit? Probably not. It requires you to make changes to your spending habits, as well as your outlook on money. Will it be quick? No. It typically takes at least a year to accrue a good payment history that will have any effect on your score, and up to 10 years to remove a bankruptcy.
However, it is definitely worth the effort. Not only will you feel better about yourself, but you’ll have an easier time getting the car, house, or even job you desire when you have good credit.
Have you or anyone you know rebuilt a credit score? What strategies were used?