High unemployment and falling home values have wrought havoc with American families and their finances. Many people find themselves hopelessly in debt and unable to maintain financial responsibilities: bills pile up, credit scores plummet and consumers are unable to secure further credit or a mortgage because of low credit scores. The challenge is how to rebuild credit when you have been hit with so many challenges. With careful planning, the average consumer can bounce back from poor credit.
Knowing what makes up your credit score will help you make the right choices when trying to manage your credit. Credit companies look at payment history, types of credit, total debt owed vs. available credit (“balance to limit ratio”), length of time credit has been established, and new accounts and inquiries. With this in mind, here are five ways to rebuild your credit.
1. Pay on Time
Make at least the minimum payments on your account on time. Late payments negatively affect your credit score. If you miss a payment, get back on track the next month. Recent missed payments have a more negative impact than payments missed in the past. If you have trouble keeping track of payments, sign up with a free online bill payment service. This will rebuild credit plus provide documentation for payments made.
2. Don’t Max Out Your Credit Cards
Credit capacity is the percentage of your total credit that you are not using. Higher credit capacity has a positive effect on your credit. For example, Customer A has a credit limit of $10,000 and a balance of $5,000. His credit capacity is 50%. Customer B has a credit limit of $10,000 and a balance of $$9,000. His credit capacity is 10%. Customer B will have a more negative credit rating because he has used most of his available credit.
3. Get Secured Credit Cards
You can get at positive report on your credit score by using a secured credit card. Secured credit cards are issued with a low credit limit based on funds you deposit with the bank that issued the card. You cannot charge more than the funds you have on deposit. This means that payments will be lower and more manageable and you won’t go over your credit limit. Making regular, timely payments on secured cards is a good way to rebuild credit.
4. Don’t Close Old Accounts
Older account or “seasoned accounts” carry more credit clout than newly opened accounts. If you are having difficulty with older accounts, try to pay them off rather than close them. Prioritize your payments. Newer accounts with small balances should be paid off first, then focus on paying down accounts with larger balances.
5. Monitor Your Credit Reports
Look carefully for errors or omissions. For example, if a payment is shown as missed that was actually paid, you should notify the credit reporting agency of the error in writing. When the error is corrected, your score will go up. You can get free credit at www.annualcreditreport.com. This report does not count as an inquiry, so there is no negative impact on your credit score.
Noelle Towler is co-founder of Secured Credit Cards 4U and is committed to helping consumers find the best financial products to meet their needs. Secured credit cards are an excellent way for consumers to rebuild credit without risking further bad debt. The website compares secured credit cards from leading US banks.