There could be a time in your life when the debt piles up high as a mountain, and a rock slide buries and destroys your finances. You have so much debt that there’s no money left for your everyday needs. Bills can no longer be paid, credit cards are maxed, and the collection agencies begin to chase after you. You keep burying yourself into a deeper and deeper financial hole, until the time comes that the money is completely gone.
It’s time to regain control of your finances and get your life back! Whether it’s bankruptcy, debt consolidation or some other form of lifeline that allows you to sleep better in life, it’s an unfortunate fact that all your skipped loan payments is now front and centre on your credit report. The accumulation of all your financial actions in the last two to ten years is converted into one single number, called a credit score or rating. Banks, insurance companies, landlords and even a potential employer can request and see your report. Based on the score they see (or compute themselves), they can approve or deny you a car loan, mortgage, rental apartment or even the job you may have been applying for.
How is Your Score Calculated?
Before you begin the process of rebuilding your credit rating, it’s a good idea to know how it’s calculated. Though the actual calculations and statistical analysis tools that go into it are mind-boggling, the factors themselves are quite simple. This is a breakdown of what goes into a FICO score, the most commonly used rating system:
- Your history of paying your bills (35%)
- Your debts outstanding (30%)
- The age of your report (15%)
- The number of recent inquiries into your report (10%)
- The types of debts you have - loans, credit cards, etc. (10%)
Usually, your FICO score is only a basis upon which lenders then input their own calculations, such as your income, what type of credit you are applying for, and how long you’ve been at your job.
I’m Now Recovering From My Debts. How Can I Fix My Rating at the Same Time?
Fixing your rating is a slow and steady process. Information in your credit report remains from between 2 and 10 years, and all new information is cumulative. Thus, if you make a strong effort to fix your rating, this positive information will begin showing up every month, and when your score is recalculated, it’ll be slightly higher.
You can view your reports for free from the 3 major bureaus Equifax, Experian and TransUnion), but only once per year, at www.annualcreditreport.com. Your score is not included with this report. A subscription to a credit report monitoring company allows you to view your reports from all 3 agencies, plus your score. This way you can view the progression every month. Another idea is to stagger your requests, so you view your report from a different bureau every four months. It’s not as accurate, as each agency collects your information slightly differently, but it should be sufficient to give you an accurate picture.
Every time you receive your report, check it for any errors. Sometimes there are mistakes that could negatively affect your score. (Murphy’s Law never allows mistakes to increase your score!) You can call and ask for an investigation into questionable actions on your account, such as a bill that is marked as unpaid, though you know you paid it on time. Sometimes, a clerk may have inputted your information in wrong, or the lender gave the wrong personal information, which then suddenly appeared on your report instead.
Apply For New Credit
While checking your reports for errors, begin the long and stable process of rebuilding your credit. You will want to show lenders that you are reliable and can pay your bills on time, and the only way to do that is to actually have bills to pay.
If your score is so low that nobody will hand you a credit card, ask for a secure credit card. With these types, your card is tied to a savings account. Money in your account is your available balance. That way you’ll be able to pay your bills on time, and this will be factored into your score, bumping it up a tiny bit.
Another way to apply for new credit is to sign up with a trusting friend or relative with a good credit score. The account will be in their name, and you will receive a duplicate card. Bills paid on time will be reflected in your score as well.
Finally, many retail stores will allow you to sign up with their own credit cards. Jewelry, appliance and furniture stores are good places to apply for such a card.
Remember, once you get your new credit, you have to use it to show you can pay it back. Make sure to give yourself limits, such as $50 - $100 per card. That way there will be no shock if all the bills come at once. Also, having a large balance will negatively affect your score, since it’s but a single snapshot in time. There’s no guarantee that this snapshot will occur after you pay the bill.
Spend wisely, pay on time and in full, keep balances low, and your rating will begin to rise. It will take at least a year of good credit history before you can take the next step, such as applying for a mortgage. But that next step will come, if you start today.
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