Is bad credit ruining your life?
When I was a young adult starting out on my own, I never understood credit or how it worked. It was something I had to come to learn.
My credit was bad.
I went straight from no credit to bad credit overnight. Defaulted student loans, bounced checks, unpaid telephone bills, and a bunch of mindless purchases cluttered my credit reports. It was bad.
I had to learn how to manage my credit and improve my FICO score if I ever wanted to become a home owner. So I got to work.
These are the steps I took. Hopefully they can help you too.
Understanding your Credit Report
There are three national credit bureaus: TransUnion, Experian, and Equifax. You are entitled to one free copy of your credit report once a year. All three reports may have slightly different information listed. This is why you want to request a copy of all three.
Each one also gives you a slightly different credit score.
Go to annualcreditreport.com to request a free copy. This site is free and will never ask you for a fee to access a copy of your own report.
Credit card purchases, student loans, mortgages, line of credits, car loans, foreclosures, bankruptcies, repossessions, bounced checks and delinquent unpaid bills are some of the different kind of financial accounts that can be reported to the credit bureaus and added to your credit reports.
In most cases rental payments and utility bills won’t be reported to the bureaus unless you’re delinquent. The unpaid balance will then be sent to a collection agency and show up on your credit report.
So, if you have never owned a credit card or signed a loan agreement and pay all your bills every month on time then you most likely have no credit or a very low credit score.
If you have ever failed to pay a bill, as in a medical bill or canceled cell phone bill, then you may fall into the category of bad credit.
Items usually remain on your credit report for up to 7 years or more in some cases.
Side note: what is a FICO score and why is it important?
A FICO score defined by Wikipedia: “The FICO score was first introduced in 1989 by FICO, then called Fair, Isaac, and Company. The FICO model is used by the vast majority of banks and credit grantors, and is based on consumer credit files of the three national credit bureaus: Experian, Equifax, and TransUnion.”
Your FICO score sums up the story of your credit report.
Are you worthy enough to lend money to and have a good history of paying it back? A lender isn’t going to know this by just looking at you or because you say so. They need proof.
Your credit score is that proof.
A good FICO score not only will convince lenders to give you a loan, in most case scenarios you will qualify for lower payments and interest rates.
Negotiate Outstanding Balances to Pay Off Debt Listed on Your Credit Report
Thoroughly read through your credit reports. See what you owe and who you owe.
Start clearing any outstanding past due balances by calling the companies and paying the balance in full or asking for a settlement.
Third party collection companies who currently hold your account should be able to give you the information of the original company you owe the debt to. Sometimes paying directly to the original debtor can knock off extra interest rates and fees. If this can’t be arranged then proceed to negotiate with the middleman (third party company).
Pick a low but reasonable figure and ask if they will accept this amount to settle the account in full? If they say no then keep going until you come to an amount you both agree upon.
The older the account the better this will work in your favor.
Do you owe an astounding balance which you feel you are unable to pay off or settle in one lump sum? Ask for a payment arrangement. Make sure the amount is affordable. Sometimes companies won’t accept a settlement and you will just have to pay off the full balance.
To prove you no longer owe the debt have the company send you a PIF/SIF letter to keep for your records. Send a copy to the credit bureaus if the balance still shows up on your reports.
Is your credit being negatively affected by a bankruptcy, foreclosure or repossession? Read this post here for further information regarding these types of debt.
Side note: Do you have student loan debt?
Defaulted student loans are a more serious debt collection. Federal student loan holders have the power to put a lien on your tax refunds, any properties you own or keep you from buying a house, new car or getting a business loan.
Since the balance is usually pretty high for student loan payments, I’m guessing you won’t be able to pay this balance off in full with just one payment. So if you do have defaulted loans ask for a hardship.
This program is designed to get your loans out of default by providing you with an affordable monthly payment.
Once out of default any liens will be lifted and the extra fees and interest rates removed. Your loan returns to the original loan holder. This will put your loan back in good standing even though you still owe the money.
See if you qualify for a forbearance or deferment if you are unable to fit monthly payments into your budget right now. Some servicers even allow you to make payments according to your income.
Make consistent small payments of $15-$30 to keep your wages from being garnished if you cannot afford to do a hardship.
Always take the initiative to make the first contact to avoid being garnished.
Do this with credit card debt, past due medical bills as well as your student loans.
Clear Paid in Full Items From Your Credit Report and Items That Don’t Belong To You
A few of the most common types of credit reporting errors are identity theft, re-aging old debt and mix-ups of someone with a similar name as yours.
To rectify these type of situations give the credit bureau a call and ask what’s needed to prove you don’t owe the balance or aren’t the owner of the account.
Usually they will have you dispute the information in writing. Which will go something like this….
Write a dispute letter and send it by certified mail for tracking purposes. Include any supporting documents (send a copy and keep the original for your records). Further information and directions on how to dispute an error should be listed on your report.
The credit bureaus has 30-45 days to investigate and give you an answer. The item will be removed if it can’t be verified or if it’s determine you in fact don’t owe the debt in question.
Be patient and stay on top of things because the process doesn’t always run so smoothly.
Raise Your FICO Score In A Year Or Less by using a Credit Card
Once you have cleared the negative items off your reports begin establishing good credit and growing your score.
Start using a credit card to raise your score fast.
Some may argue with this but it’s all in the way you use the card.
If you don’t already have a credit card apply for one with a small credit limit. Purchase something small (like a candy bar) and pay the balance in full every single month.
Do this exact same thing the next month. Continue doing this for 6 months to a year. You should start to see a significant hike in your credit score.
Visit creditcards.com if you are having trouble getting approved for credit. Cards are even available for individuals with poor credit. Just be mindful that the interest rates and fees may be a little higher. Once your FICO score improves then apply for a better credit card.
Other ways to help raise your FICO score:
- pay your bills on time
- avoid opening too many credit accounts at once
- avoid closing unused credit cards
- Paying off any loans early can help raise your score as well
Side note: Get a secured credit card
Have trouble getting approved for a traditional credit card or feel nervous about owning one? See if your bank offers secured credit cards.
A secured credit card is attached to your bank account. The funds in your account are frozen and you borrow against them. So it’s low risk because you can’t go into debt. You are borrowing your own money. Plus a secured card does get reported to the credit bureaus.
What To Do If You Can’t Make Your Old Credit Card Payment(s) And It’s Negatively Effecting Your FICO Score
There are legitimate companies that can help with paying off credit card debt. They are called credit counseling services. A credit counselor teaches you how to pay off your debt and helps you to keep from accumulating new debt. The first initial consultation is usually free.
There are many different credit counseling services available. You have to shop around for the best one for you.
Make sure to avoid scams. Look for a non-profit credit counseling service.
Some of them offer free resources such as budgeting work sheets, debt calculators and financial workbooks. They also offer programs where they can call your creditors and negotiate on your behalf.
When searching for and researching a credit counseling service make sure they are accredited by one of these organizations:
National Foundation for Credit Counseling NFCC
Financial Counseling Association of America FCAA
Search for a reputable credit counseling service through nonprofit agencies, your local churches or other places of worship and credit unions.
Side note: credit counseling services vs. debt settlement companies
Don’t confuse debt settlement companies with credit counseling services. Most debt settlement companies make big promises they can’t keep and try to collect as much money from you as possible.
How To Manage Good Credit And Keep your Score High
Have a plan when paying bills. Stop taking on more credit than you can handle.
Think before you make any huge purchases. Don’t open up every credit card that you get offered! Stop borrowing money (LOANS). Save up instead.
Don’t allow anyone else to tell you what you can and can’t afford (banks, loan companies, mortgage companies, etc.)
Instead calculate your budget and figure out on your own if you can afford an extra payment. Don’t buy unnecessary items and then fail to make the payments.
Keep really good health insurance if you can to keep from accumulating medical bills. Work on paying off debt before the loan agreement ends on car notes, mortgages, business loans, student loans and any other type of loan.
Be determined verses feeling burdened when it comes to your credit. “Bad credit” doesn’t have to be your middle name for life.
It’s possible to turn around that score and clear those collection items off your reports and keep them off for good.
Go forth and grow good credit.