Improve Your Credit, Improve Your Life
If you are not paying for everything – including your house and car – you need to make sure that your credit is the best it can get. Even if you think you’ll never use credit, you still need a card for things like flight or car reservations.
For most Americans, it doesn’t matter whether they take out a loan or not. Most people do. Instead, it’s about what kind of credit you can get. You need huge amounts of credit, the best rates, no annual fee and so on.
We live in a nation that is flooded with debt and credit problems. There is a vicious circle where people take out loans because they cannot afford to pay anything in full, but they exhaust so many cards that eventually they cannot even reach the minimum on their credit accounts.
Look at where you are now
You can fix something until you know what needs fixing. Perhaps you have been told that you have been denied a loan, and this has sparked your desire to clean up the mess and be in good standing.
Or maybe you’re considering buying a large sum of money (like a new car or mortgage) and want to make sure you’re where you need to be. Burying your head in the sand and ignoring the problem only makes it worse.
First, order your credit reports and valuations. This will provide a benchmark of what it costs to get you to a place where you are considered a “good risk” rather than high risk.
You may order a free credit report once a year from all three credit bureaus (TransUnion, Equifax, and Experian). You can also sign up for ongoing access and notifications on a monthly basis if you wish, and this can save you money in the long term.
You can also get your results, which are a numerical indication of your credit score, from all three credit reference agencies. You may also want to run your FICO score, which is slightly different and is used by some lenders to determine whether or not you are a suitable credit candidate.
After you have seen what you are dealing with, it is time to start making repairs to your credit. Here are some things you can do – some you may not need – and others you will take. Everyone is different.
Correct any errors in your credit report
First of all, go through your credit reports from all three offices with a fine-toothed comb. You want to make sure that your credit file does not contain any errors. Some of the most common mistakes you might find are
- – Another person’s name is on your credit report and is stated slightly differently – for example, a different middle name, first name or surname. It could be a family member or somebody you don’t even know, such as the difference between John Doe II and John Doe III.
- – Someone could have hijacked your social security number (fraud) and the one who is credited with his story is you.
- – You don’t have an account with a lender who reports your credit history. This can happen, for example, if a clerk has entered the number incorrectly.
- – Your ex-spouse’s information is mixed up with your information for a new account you opened in their own name.
- – The date on which an old, negative item is removed from your account, such as bankruptcy, has passed.
- – The payment status is incorrect. Maybe you paid a debt months ago and it’s still reported with a balance – you can get them to update this information to reflect the new status.
To correct your credit report errors, all three credit agencies have both online and offline reporting options (snail mail). You submit the corrections and give them time to investigate and make corrections.
This won’t happen overnight, so it’s important that you start cleaning up your credit report as early as possible when you know you have plans to purchase a large item or apply for credit lines.
Repairing damage that has already occurred
Before you start calling creditors and closing all your accounts on a whim, you should understand that it is not the cards that ruin your credit – it is the way you use them.
In fact, if you close your credit cards, you could even ruin your credit score. This is because you are getting rid of cards with long life, available credit, and in some cases good payment history.
When you pay off these cards, your balance/limit ratio improves, increasing your creditworthiness. The more credit you have available to you, which you should leave unused, the better it looks for you.
Whenever you can, get your creditors to increase your credit limit as well. This increases the amount available to you and looks good for the creditors. Sometimes this happens automatically, and sometimes you have to ask for it.
Some things you will have to drop from your credit report. For example, if you have been late with payments and some of them have been in arrears, it can take seven years before they fall behind.
If you have public records such as liens or bankruptcies, it can take 7 to 15 years to get them back – most public records take seven years, bankruptcies 10 years and tax liens 15 years!
This can be grueling while you wait for your credit to improve all the time, but as long as you clean up the rest of your credit, the lenders can work with you on the other points. It may not be the best interest rate, but in many cases, it will not be a firm rejection.
The best thing you can do is to pay off your debts and stop using your credit cards. There are two ways to reduce the amount owed. Most lenders will advise you to pay the cards with the highest interest rate first and only make the minimum payments for the others.
But some people need a little more motivation and enthusiasm as they go through this process. That’s why they may want to go a different way – one where they pay out the card with the lowest balance first.
If you use the lowest balance approach first, you can transfer these minimum payments to the next card as soon as the lowest card is fully paid.
When you have your credit points in front of you, the report will actually tell you what you’re doing wrong – and what you’re doing right! This can be a great help on the way to your credit recovery.
For example, it could say:
- – You have made your payments on time – that is something you do right!
- – You do not constantly apply for new loans – another advantage.
- – You have several types of accounts, so lenders can see how you manage your debts overall.
- – You have a mortgage – and pay it on time – very responsibly from you.
- But then there might be some negative points in your report, such as
- – You have spent 90% of your available credit, which gives the impression that you live off your credit cards.
- – You’ve spent more than half of your credit – you should be able to get some cards paid out in full
- – Your credit limit is too low. If lenders give you a high credit limit, it means that you have experience in dealing with larger credit lines available.
You should check your credit report regularly – or even better, sign up for the notification system, which will notify you of any changes to your report. This way, you’ll always know where your credit stands.
Maintaining a high-quality credit history
Pay your bills on time, every time. Creditors may waive a late fee and not even report you when you call and explain a situation, but don’t expect them to do it for you again and again.
Never let anything go into debt collection. That’s the worst thing – if creditors have to chase after you to try to get money from you. Instead, call and negotiate a payout amount or a new payment date.
Pay as much as you can or get a consolidation loan to get a monthly bill instead of making multiple missed payments. Do your best to avoid debt collection agencies.
It’s okay to use a loan, but try to pay your credit cards in full each month. If you can’t do that, make sure you keep your expenses in check and don’t go crazy by charging unnecessary items.
Use the new credit lines sparingly. If your score and report are okay, you will receive many offers by mail. Do not open new ones unless it is really necessary and necessary.
Every time you make a request for a new credit line, it will appear in your credit history. Having 1-2 requests is fine, but more than that, and it starts to affect your credit score.
Whenever you apply for new credit, you make smart purchases. If your score and history are adjusted and increasing every month, you don’t need to accept a loan offer with an unusually high-interest rate or a high annual fee.
Is a loan consultant or debt consolidation a good option?
In some cases, they are a wise option – but not for everyone. Basically, if you can do it on your own without debt counseling or a consolidation loan, then it’s better to do it this way.
But some people are simply not good with money or their loans, so it can be a real blessing to be accompanied by a professional companion who will take the stress of the situation out of your life.
A loan counselor is someone who will help you draw up a budget and debt plan. He will educate you about your finances and help you know what the best course of action is. The National Foundation for Debt Counselling is one possibility. It helps you to use a cost-effective scale.
When you find a credit counselor, he will ask you to bring all the payslips you have, along with bank statements, a list of assets and a list of your monthly bills including food, gas, etc.
If you already receive calls or letters from debt collection agencies, they need to be looked at so that they can help you find the right way as soon as possible, because these are the most urgent.
The most important thing to realize before you contact a credit counseling service is that there are a lot of scams. You want to work with a non-profit agency – one that will do you no harm when it comes to your credit score.
Debt consolidation is where you take all your debts and combine them into one account, usually reducing your monthly payments. However, this does not immediately increase your creditworthiness.
In fact, it may even hurt in the beginning. Yes, you will reduce your monthly payments – so if you can’t make your minimum payments, this might be an option. But suddenly it puts a tough demand on your credit report – and you now have a large installment credit on your credit report.
It can be frustrating and discouraging if you are in a hurry to clean up your credit. Sometimes you wish you just had a clean slate to do it all over again – better!
But it doesn’t work that way. The good news, once you have your money under control, you can enjoy untouched credit for years to come. It is very liberating when you are no longer under the thumb of the credit and debt monster.