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Rebuild Your Credit

 | Jul 22,2007

Good credit is not a luxury. It is an absolute necessity in today’s credit-driven world. Your credit rating not only is used to determine if you will qualify for a credit card or home loan, but it is also used to determine if you are a suitable candidate to get a lease on an apartment or to get a new job.  If your credit is currently less than perfect don’t worry. There are ways you can rebuild a bad credit rating. 

What is a bad credit rating? Normally, it's considered around 600 and below.  A low credit rating shows that you've had trouble paying debts in the past.  If that's the case, you are a higher risk for paying off debts in the future.  Lenders will then need to raise your interest rates as a form of insurance in case you default again.  That's the basic formula. 

Identify Your Credit Problems

Most credit problems are caused by:

1. Late payments
2. Missed payments
3. Maxed out credit lines
4. Having a short credit history

You can identify all of these problems – and fix them – by reviewing your credit history. You can get your credit history by signing up for a credit monitoring service or by requesting a copy of your credit report directly from a credit reporting agency.  Here you'll be able to see all of the problems with your credit history, including those problems that may have resulted from fraudulent activity. 

Fix Your Credit Problems

Once your credit problems have been identified you are in a good position to do something about them. If your low FICO score is caused by late payments or missed payments, you need to adapt an aggressive debt payment strategy.  This means budgeting effectively by taking into account every possible expense throughout the month and cutting out what's unnecessary.  You may be missing payments due to carelessness or because you have limited funds when the bills are due.  In the latter case, budgeting is crucial.   

If your low FICO score is caused by maxed out credit lines then the solution is to work towards paying down your balances. It's important to pay off high-interest debt first because this debt has the worst long-term implications.

Build Better Credit

Your next step is to take proactive steps to build a new, positive credit foundation. To do this you will want to open new credit accounts, such as credit cards, and manage them appropriately to develop a higher FICO score. This can be accomplished by charging and paying off purchases in full each month. Remember to manage your accounts responsibly so that your attempts to increase your FICO score don’t backfire - i.e. don't overuse your cards and get yourself back into debt trouble.  In general, rebuilding credit via secured credit cards is the the easiest way to get your credit rating headed in the right direction, as these are these easiest loans to secure.  

Apply for Credit Cards

Depending on your personal scenario you'll want to posture this approach differently.  If you already have 4+ cards you don't need to apply for more credit you need to begin by paying off your high interest rate cards first after you've attempted to obtain lower rates from each issuer.  If you have fewer than 4 credit cards you can use this method to rebuild your credit.  Begin by searching for the right card.  Search by Low Interest Rate Cards, Balance Transfer Cards or Instant Approval Cards.

Once you've identified the right card, submit an application and put the card into your rotation: 

The Credit Card Rotation

List your Cards by Interest Rate from high to low.  You will begin paying off the highest interest rate cards first by paying what you can afford while paying the minimums on your lowest interest rate cards.  Obviously since your new card does not have a balance you will not be required to make significant payments if any on this card.   If you typically use your ATM/Debit card for small purchases like Gas, Lunch, etc... replace these types of purchases with one of your cards and plan for the amount your spending just like it's coming directly out of your bank account.  The reason you are doing this is that you are going to pay it off in full at the end of the month.  By using your cards within control and paying them off in full you are building a good credit history. 

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