How to Rebuild Your Credit

Rebuilding your credit will help you qualify for credit cards and loans.

It’s easy to get carried away with the lure of buying stuff on credit. I mean, why limit yourself to a salary when you can easily charge it now, and pay for it later, right?

Maybe you love driving the latest SUV, and since it’s relatively simple to qualify for an auto loan, why not make it stretch? And what about your house? Did you pay for the entire purchase upfront, or take out a hefty mortgage? Your open credit line, auto loan and mortgage enable you to live a lifestyle way beyond what your cash salary would allow.

The bad news is that at some point, careless spending gives way to mounting debt. Loans need to be paid back, or you may be confronted with a car repo, high interest rates, a home foreclosure, and declining credit score. Even worse is bankruptcy.

After going through bankruptcy, arrangements with the credit card company and loss of your house, you’re ready to turn over a new leaf. You’re ready to spend responsibly and borrow only what you can realistically expect to repay.

Your past may come back to haunt you, though.

A low credit rating impedes your return to a normal fiscal lifestyle. Your credit card applications are rejected. You even have to relinquish your dream of owning a home since you can’t even consider applying for a mortgage. Don’t despair. With the proper foresight and effort and with the passage of time, you can rebuild your credit rating.

Rebuilding your credit line is a three-staged process

There are 3 stages to rebuilding your line of credit:

  1. Eliminate negative credit and bad debts from your credit report.
  2. Actively pursue new lines of credit.
  3. Show responsible credit and debt behaviors with your new credit.

Remove negative credit and bad debts from your credit report

First, order a copy of your credit report from the three credit bureaus:

  • Equifax
  • Experian
  • TransUnion

Study the reports carefully. Note all the negative credits and bad debts listed on your report. Are they all accurate?

If not, contact the credit bureaus to note any errors.

Occasionally, people who emerge from bankruptcy have open accounts noted on their credit report, though they were cleared during the bankruptcy agreement. Inform the credit bureaus to note that they were “included in bankruptcy” so that the overdue accounts will be marked as closed.

The obvious way to eliminate negative credit and bad debt is to pay down your debt. Speak to a consumer credit counselor to help you create a payment schedule for repaying your open bills.

According to 1-855-Jet-Debt, you should create a list of the highest interest credit cards to pay back first, along with expected penalties and fees. Knowing who to pay back first allows you to be much more efficient.

Actively pursue new lines of credit

Burned by your previous unpleasant experience with credit, you may want to abandon credit forever. With ever-present auto, business and mortgage loans, however, this is an impractical long-term solution. While living on a cash-only basis will ensure that you live within your salary, it will not help you rebuild your line of credit. In order to restore your credit score, you need to exhibit responsible credit behaviors.

If you can’t qualify for traditional, large bank credit cards, look for credit cards from local stores, credit unions, or gas cards. You can also consider secured credit cards. A secured credit card offers a credit line corresponding to the deposit you make with the card company.

Example: A $500 deposit will gives you a $500 line of credit. Don’t confuse secured cards with pre-paid cards which are not reported to credit bureaus and don’t affect your credit score at all.

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Rebuild your credit by paying off all debts each month

Once you’ve been approved for limited credit – either secured or from local stores – it’s time to control your credit spending. Do not rack up high bills. The general rule is that you should not put any purchase on your credit card unless you are confident that you’re able to pay the full amount at the end of the month.

Limited credit is meant to prove that you can make timely payments successfully.

Credit card companies generally allow you to switch from a secured to unsecured credit card after about a year in a half. Be careful not to apply for credit too often, as multiple credit applications can lower your credit score. Wait at least 6-months between credit card applications.

Even though rebuilding your credit demands time and effort, with some determination and resolve, you can raise your score dramatically. Best of all, a high credit score will reflect your new responsible fiscal habits.

You’ll sleep better at night, since you won’t have the worry of overdue loans and ominous debt.

Learn to how to calculate your debt-to-income ratio.

10 Really Bad Personal Finance Mistakes

This article is a guest post from MortgageWiki.org – they publish buyer and homeowner tips and guides. You can check out their content by visiting mortgagewiki.org.

No matter your long-term goals, financial blunders can have long-lasting implications. For example a ruined credit score means you won’t be able to buy a home because there won’t be a bank that will approve you for a home mortgage. In this case you’ll have to pay for everything in cash, or take on a loan with very unfavorable terms.

The good news is that if you live within your means, you’ll be attractive to banks, lenders, and creditors.

Below is our list of common personal finance mistakes people make.

#1. Not having a good credit score

Credit scores are a financial profile of your borrowing and payment history. In many cases your credit report and credit score is a preliminary check when a lender is considering your application for a loan or credit card. The three-digit number ranges from 300 to 850, with score above 661 being good and scores below 600 considered “bad”. It basically measures the likelihood that you’ll default.

Many businesses – creditors, lenders, and other businesses – use a credit score to decide whether or not to approve your application and use it to create a max credit line, interest rate, and other loan terms.

Waiting too long to start building your credit means you’ll often have trouble getting approved. Also if approved, you may have to pay a higher interest rate or security deposits. By building a good credit score you’ll have a lot more options when it comes to any type of credit line.

#2. Not saving enough money

Most people won’t realize the value of putting money in a savings account until it’s too late. There’s several excellent reasons to put as much money into savings as possible.

It’s recommended that you keep an “emergency fund” of $5,000 or $10,000 to cover sudden, unexpected expenses. If you ever have a job loss or reduction in household savings, income can help supplement the loss. Savings can also be used for a down payment on a home or car, to pay for a child’s college tuition, or even starting a new business.

#3. Buying a home before you’re ready

For years, owning a home has been an essential part of the American Dream. But, rushing to make that dream come true can turn life into a nightmare, especially if you’re forced to take out a high-interest mortgage because you have a bad credit score.

FYI: To get the best mortgage rate you’ll need to have a credit score of 721 or higher.

A home mortgage is a major financial obligation. With homeownership, you are responsible for property taxes, homeowners insurance, HOA fees, and home maintenance and repairs. Buying a home before you’re ready can derail your financial progress, or delay other financial goals. Even though interest rates are near an all-time low, make sure to follow sound advice when deciding to buy a home.

#4. Carrying high interest credit card debt

If you don’t get rid of your high interest rate debt now, years down the road you’ll look back with regret about how much money you wasted on interest payments and fees. It’s money that you can’t get back. Cash that could have been invested or spent on something worthwhile.

Credit card debt is notorious for super high interest rates. Some cards carry annual interest rates upward of 30-percent!

Focus on getting rid of high interest rate debts now, even if you have to make some sacrifices. The money you save on interest and finances charges will be far more productive being invested or saved.

Each U.S. state is different when it comes to a statute of limitations. Debt collectors in California have 2-4 years.

#5. Not buying health insurance

Forgoing health insurance may sound like a good, temporary way to lower your expenses and have more cash on-hand. But not having health coverage is very risky, even if you’re healthy.

Health expenses are expensive. You could have an accident or fall ill at any point, and have to foot the hospital bill in cash or on a credit card. Without health insurance, you’re financially responsible for all your medical bills. If you can’t afford to pay medical bills, it could push you into bankruptcy. Medical debt is one of the biggest causes of bankruptcy in the United States and it stems from a lack of health coverage.

Even if you are hurt at work, your disability insurance won’t take care of everything, and it’s usually an incredibly hard process to navigate. Most people need a lawyer to get through the Social Security disability process.

Going broke from medical expenses is something people don’t realize or plan for until it’s too late. Be safe and buy health insurance. Even the most basic policies can be affordable.

#6. Waiting too long before investing

Investing may seem intimidating, but once you understand how investing works, you’ll be upset with yourself for not getting started earlier. When you start investing earlier, your money has more time to grow.

It’s also wise to diversify. You may have heard the idiom, “Don’t put all your eggs in one basket”. If you put it all into one stock and the stock dips, you’re in trouble. By diversifying you are hedging against risk, and invested for the long-term.

If you’re younger and don’t have family or financial obligations, you have so have a lot of flexibility in how you spend your money. And for this reason it’s one of the best times to get started investing.

#7. Not Diversifying Your Career Skills

The workforce is changing. Automation is eating up admin work, and people are being outsourced technology, or someone cheaper. You’re out of your mind if you think what you do with your career is not a financial decision.

Everyone wants to “do what they love,” but very few people love what they do. They do it for money, plain and simple. Apart from the obvious ones, automation software is already taking hold of marketers, project managers, IT professionals, AP clerks, and the list goes on. It’s taking aim at more careers too.

If you want to stay employable, start embracing technology, and getting used to managing it. You should also be familiar with whatever higher-level tasks are available in your career vertical. This will be a huge help down the line.

#8. Living above your means

Spending more money than you’re bringing in is the express highway to financial disaster. There are only two ways to fund this lifestyle – either by dipping into your savings or creating additional debt – and both are disastrous.

You can ensure you’re living within your means by creating and sticking to a monthly and annual budget. Lower your expenses so they fit within your income rather than stretching your spending outside of what you can afford.

#9. Not educating yourself on personal finance

It’s your job to learn as much about personal finance as you can so you can work toward a secure financial future. There’s a wealth of free information available on the internet. You can also check out books from the library or purchase books if you prefer to own them.

Investing in your own personal finance education will prove to be invaluable when you look back ten years from now.

#10. Loaning money to friends or family

This is a debatable topic, and for good reason. Most of us want to help a loved one who’s in a tough spot, but all too often, these situations backfire. Loaning money to a family member get out of debt or helping out a friend has the potential to ruin your relationship, permanently.

Loaning money to friends and family turns your relationship from personal to business.

If they can’t afford to pay you back, it can put a strain on your relationship, and possibly even end it for good. That’s not to suggest you can’t help out, but considering your help a gift rather than a loan can keep your relationship from falling apart.