Repair Your Credit

If you're struggling with debt, here are few steps you can take to repair or rebuild your credit on your own before accepting one of the many "debt consolidation" offers or resorting to bankruptcy.

Steps

 * 1) Create a budget. Calculate your income and your expenditures. The best way to figure your expenses is to track your spending for 30 days. Find out how much money is going to leisure activities and going out to eat. Then figure out how much money you can set aside each month to whittle down your debt. There is a lot of free budgeting software out there, just look.
 * 2) Be aware of what's in your credit report. By federal law, you can get one copy of your credit report from each credit agency, (Equifax, Experian, and Trans Union), each year. You can get all three at once, or spread them out through the year.  Go to the AnnualCreditReport.com website. The "free" offers on the web automatically enroll you in a monthly or annual program that costs money -- quite a lot for someone already in financial trouble.
 * 3) *The most important thing to do with your credit reports is to review them for accuracy. It's tough enough paying for your own mistakes -- you don't need to be penalized for someone else's.  (See Tips, below.)
 * 4) *You can also quickly see the two biggest red flags creditors, (and employers, and insurance underwriters, and ...), look for: late or missed payments, (especially recent ones), and maxed-out credit lines.
 * 5) Contact your creditors. Preferably not after months of harassing calls, but as soon as you realize you won't be able to make the requested payments. Most creditors are not as cut-throat as you think, and they will work with you to schedule smaller payments that fit your budget. After all, they'd much rather receive $20 payments for the next year than risk getting nothing in bankruptcy court. This is one of the places having a written budget can really pay off -- tell them you've worked out a budget, can afford to pay them $X, and offer to send them a copy of your budget. They're much more likely to accept your offer of lower payments if you can show good faith.
 * 6) Get any agreement in writing. If you are able to negotiate lower payments, interest rates, or balance payoffs, request they send a letter confirming it. Having it in writing is your defense against changing minds, lost records, new management being more aggressive, or any number of other things. Once you pay off your debt, make sure you get a settlement letter and send a copy of it to the credit bureaus so they can update your credit report.
 * 7) Cut up the cards. Even if you do nothing else, stop charging, and keep paying at least the minimum on everything. Eventually, you will get them all paid off.  Keep one card available, but difficult to use, (e.g., put it in a bowl of water in the freezer), for those times when you have to have a credit card.
 * 8) Keep some credit accounts open. Close no more than one or two every six months or so. A sudden burst of activity of any kind reflects poorly on your financial stability. When deciding which accounts to keep open, keep at least the one or two oldest accounts -- the third-biggest factor in your credit score is length of credit history. Having 5 accounts with zero balance on four and $500 on one lowers your credit risk, as opposed to 2 accounts with a $250 balance each.
 * 9) Pay off your debts. Once you've decided how much you can pay against your debts, and negotiated any lowered payments, you must allocate that portion of your budget to each creditor. Pay the minimum (or agreed amount) to each and every creditor, every month, on time.  Then pay any extra against the lowest outstanding balance.  Each time you pay off your lowest balance, celebrate, then "snowball" your payments onto the lowest remaining balance.  Total debt outstanding constitutes nearly one third of your credit score.
 * 10) Get a secured credit card, if you don't have a traditional one, and need to build up your history. You're unlikely to be turned down for one because you supply the money up front as a collateral. If you deposit $300 with the bank, you'll have $300 credit limit on your secured card. Beware of the high interest rate and various fees often associated with a secured card. Pay in full, on time, every month to avoid most of those fees.
 * 11) Join a credit union. They're more likely to give you loans in the future than a regular bank.
 * 12) Make all payments on time. Don't arrange a lowered settlement amount you can't pay. It will only reflect badly on your credit. Payment history is the number one factor in your credit score -- over one third of your score.
 * 13) Avoid bankruptcy if at all possible; it shows up on your credit for 10 years. Don't take the easy way out now, you'll pay for it later. It takes a lot more hard work and dedication to rebuild your credit than it does to declare bankruptcy, but you'll be glad you did.
 * 14) Add good credit accounts to your credit files. When you add good credit tradeline accounts to your credit profiles, you increase your credit score. If you add good credit accounts and have even one bad credit account deleted from your credit reports, your credit score could increase by as much as 80 points with just these two actions.

Tips

 * You can get negative items removed from your credit report if they are inaccurate or incomplete. Write to the credit bureaus and tell them that the items are inaccurate or incomplete and you want them removed. When you dispute a debt the credit report agency has 30 days to receive a response from the creditor to validate the debt. If after 30 days they do not receive a response the Credit reporting agency by law will remove the entry from your report. Remember there are three agencies, so you have to write to all three.
 * You want to show that you are responsible with high balances, so you'll want to have high credit limits but a low balance. It actually helps to have a high balance that you've paid off.
 * Get a loan from your Credit Union or Banking establishment, then immediately (that day) turn around and open up a savings account. Make payments on the loan from the savings account. DO NOT use the money for anything else! This will help improve your credit as you pay off the loan. Be advised, however, that the interest you pay on the loan will typically be larger than the interest earned on the savings account. Thus, toward the end of the loan, you will empty the savings account and still owe something.  But if you can cover the difference, your credit score should be better as a result.
 * Your credit report is your guideline. Each account on your credit report has a rating. A sample credit report will be provided to assist you with reading your report. The rating may change depending on the agency. A letter followed by a number indicates the type of account and the rating. If you have an account that is rated as an I1 that is an individual account that is paid on time. If you have an account that has a J1, that is a joint account. An I5 could mean trouble. Highlight everything that isn't a 1 and everything that is turned over to collections. Make a list on your computer from the lowest amount to the highest. Start with the lowest amount and either pay the debt or dispute it.
 * Many companies report things in error. Maybe your name is spelled the same way as someone else’s or perhaps they didn’t list a payment that was made. The point is errors happen and credit companies must respond within 30 days if you challenge an entry that was made if you think there’s an error.
 * Fool the Computers
 * Most banks and credit companies run on computerized software that tells them what amount of repayment is due to them each calendar month.
 * That software doesn’t care if you pay your bill daily, weekly, bi-monthly or whatever – as long as the correct amount of money is sitting on your account by the due date.This is where computers can be fooled into thinking you’re much better with your credit by doing some simple things.
 * Divide your monthly payment into a weekly payment (or fortnightly)
 * Make your repayments more frequently (like weekly or fortnightly)
 * Round your new repayment amount up to the nearest $5
 * By doing these little things, the computer instantly recognizes that you’re paying more than you need to and you’re paying more frequently than required. This can improve your credit score and have the added benefit of making it harder for you to fall behind with payments in future.

Warnings

 * Don't cancel any of your credit cards! Pay them off, don't use them (or don't use more than you can pay off each month), but keep the accounts open.  You want to have a long credit history with at least three "trade lines."  Canceling a credit line can drop your score by 30 points or more and it can take years to recover those lost points.
 * Don't open charge accounts with department stores. It hurts your score, for the short term.  Open credit cards with a bank and never charge over 1/3 of your total credit line unless you can pay it down the same month.

Related Tips and Steps

 * How to Deal With Collection Agencies
 * How to File Bankruptcy
 * How to Avoid the 5 Most Common Reasons for Credit Denial
 * How to Get Your Credit Report for Free
 * How to Get Out of Debt
 * How to Rebuild Credit After Bankruptcy
 * How to Start Living Frugally
 * How to Avoid Bad Credit

Sources and Citations

 * Experian
 * Trans Union
 * Equifax
 * Free Annual Credit Report