A credit score is an assessment used by financial institutions, such as banks, that is used to assess a client’s ability to manage their own credit, and how well they can be trusted to pay back the money loaned to them.
Rebuilding your credit score is part of the recovery process required for being able to apply for credit channels such as mortgages, cell phone contracts, loans and credit cards. Although the best credit repair steps are similar whether you’re just starting out or needing to repair a damaged credit score, it’s different to building a credit score from scratch, because when you have no credit score, lenders will have no information about you and it’s relatively easy to gain a good credit score in a short amount of time. When you have a bad credit score, it’s the opposite problem, the lenders will know too much about you and it’s a lot harder to get yourself further from the red zone.
Let’s Get Started.
Start by checking your credit reports. You’re entitled to a free credit report from each of the three major credit reporting agencies every year. These reports can involve a lot of information that may make the average person feel overwhelmed, as they can be long and use complex credit industry terms. However, no matter how daunting you find it, make sure it’s correct and that you have some basics established:
Make sure your credit score is in date – older debt penalties that your credit score has encountered should be questioned, as debt that is more than seven years old should not be counted towards your current score.
Make sure your score is about you – It’s not entirely uncommon that some credit scores pick up information about people with similar information to yourself such as same names or same date of birth. Don’t pay the price for someone else’s credit related mistake.
Make sure your credit score is given a fair chance to recover – this can be done by holding down stable employment, sticking to a budget and minimising your credit channels.
In extreme cases, one-on-one help from a professional is available and an option to consider is to go to a nonprofit credit counseling center for help with budgeting and a consultation on options for getting back on track. If your finances are very unstable, bankruptcy may be the most realistic option.
These are the five options that we recommend to rebuild that credit score.
1. Get a Secured Credit Card
What is a secured credit card I hear you ask? It works like a normal credit card in the sense that you have monthly repayments and interest to look out for. However, in order to obtain one, you must put down some money as collateral, which works as a deposit. This is an option for people who have poor credit scores and the collateral and interest may increase the worser the score. You must also keep within your credit limit at all times and try to keep within 30% – for example, if your credit limit is $1,000 then try not to use more than $300 credit. It should be noted that you may lose your deposit if you go over your limit which will affect your score negatively.
2. Credit Builder Loans
The description is in the name, this is the type of loan that you get to help rebuild your score. The ability to make repayments and pay off the loan in the specified time period will repair your credit score, which will make you more desirable to lenders. Before taking out a loan, you should always make sure you are in stable employment and earn enough money to make the repayments, as missing payments will damage your score further.
3. Get a Friend to Co-Sign You
This is a way to use your friends healthy credit score in order to be able to get a credit channel with better interest rates that your score may not have been able to get. This option has many risks attached as if you aren’t able to make payments for whatever reason, your friend will suffer the consequences of bad credit and will be partly responsible for any debt racked up on the account. This option has also been known to end the best of relationships so make sure you can make repayments and if you are the co-signer, make sure you only lend to someone who you trust completely.
4. Become an Authorised User
Being an authorised user is basically attaching yourself to someone else’s credit channel without being legally responsible for the account. This recovery tactic is a good option because authorised users can have limits applied to their spend, meaning there’s not much room for error and it can really help the authorised users poor credit score, as the longevity of the overall account will be taken into consideration and applied to their credit score. However, the consequences are the opposite of a co-sign because if the account holder doesn’t keep up with the payments, your credit score will suffer.
5. Keep Repayments Regular and Credit Balances Low
The key issue here is trust. The most obvious option of all is to make sure you never miss a payment on your credit channels and also keep your credit channels to 30% of their limit to help maintain a healthy credit score. Credit utilization, it’s industry term, is using only a small percentage of the credit available to you and appeals to lenders because it shows some self control and proves that you can be trusted to borrow credit responsibly.
No matter how bad things get financially, there’s always a way to get better. Nothing in life is permanent and that goes for bad credit scores also. If you follow the tips above, you will be well on your way to getting your credit score out of the red and into the green.