1. Discover Your Credit Score
Your first step is to find out what your credit score is. You’re entitled to a free credit report once a year. However, the annual credit site does not provide your score. But with derogatory credit, you may not be approved based off of certain items that are on your report (making your score irrelevant). So at your discretion, you may use other services to obtain/pay to view your score. Bottom line, if steps 2-5 are required, then it’s not a huge deal. Yet…
2. Payoff Bad Debts
If any of the debts shown on your report are owed to companies that have gone out of business or merged with other organizations, then ask for the liability to be verified. If the creditor can no longer provide the necessary evidence, you can demand that the debt be removed from your report.
Also, you probably can negotiate a lower payment/payoff amount with creditors/collection companies that will help you pay off your credit account quicker. Another bonus of using this method is that part of the terms of the settlement you can have the creditor remove the account upon payment. Which helps you remove derogatory credit and rebuild your credit faster. It also removes the step of removing or disputing the item(s) later on.
3. Pay down current (good standing) credit accounts to at least 30% of total credit line per account.
It is important that you stay current on all the accounts that appear on your report. However, your score is unlikely to improve if you pay down non-revolving credit (such as mortgages, student loans and car loans) early (half the time of the terms). But you’re still paying that pesky interest, so if you plan to pay it off early (in half the time), make double payments monthly. You typically pay interest early in the loan (principal amount goes down once the bank receives the interest, so that may be the best way. This is better explained on the Credit Score Page). So to start with, focus on your credit cards. If your priority is to lower your indebtedness, pay down the plastic with the highest credit card rates first. However, if you mainly want to boost your credit score, begin by paying down any balances that are higher than 30 percent of your credit limit. Ultimately, your goal should be to drive down your “credit utilization ratio” even further. If you can, try to get the total owed down to zero, or at least have the limit down to zero by the time your statement hits. Once again, visit our Credit Score Page for more information of this.
4. Statement of debt
If you’ve had a difficult time negotiating a payoff for your account, or still owe you’re entitled to leave a short personal statement on your credit report that explains why you’ve had difficulties. But typically this doesn’t matter if there are lates/collection accounts. Most lenders have a computer-based process when you apply, and if there is negative information, you may be denied on the spot and that’s it. But this might help you, so why not? Try to be factual rather than emotional. Your objective is to persuade the reader that you’ve had understandable short-term issues that have now been – or soon will be – resolved.
5. Secured Credit Cards/Accounts
If your credit cards have already been cancelled/written off, it might be time to consider getting a new one. The trouble is, your application for a mainstream (regular/unsecured) card is likely to be unsuccessful. Instead, consider secured credit cards. You have to pay a deposit in advance on these, and that amount is likely to be your spending limit. So you’re using your own money. But you can normally expect your deposit back in full when either you cancel your card, or the issuer upgrades you to one of its ordinary, unsecured credit cards (usually the case anywhere between 6 months to one year based off of payment history, amount of your deposit/line, and amount owed at time of at least one monthly statement. This is better explained on our credit score page (mentioned as ‘backbone’) just make sure that you choose one of the many secured credit cards that report to the three big credit bureaus. That way, you have the opportunity to rebuild your credit score. One downside is higher interest rates, so be sure to pay off the amount owed monthly (never carry an existing balance statement to statement). Typically you will not be charged interest – So check the cards terms before agreeing to open the account, it’s your call. But – Usually it’s a necessary evil to raise to raise your score. The bonus is it may be a one-shot deal, if plan on never carrying a balance (you obtained the card just to have a positive trade account on your report). Once again, check our credit score page – its part of the ‘backbone’ method.