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Big, bad problems can happen to you -
bankruptcies, divorces, law suits, non-payment of taxes. These
are big problems that can affect your credit score in as big
way. If you have faced a large problem that has ruined your
credit, you need to take action fast and work consistently to
boost your FICO score:
Tip #25: If you have bad credit,
establish better credit by taking out credit and repaying it
quickly
If you have terrible credit following a
bankruptcy or other major financial upheaval, you may need to
get back into a good credit rating by taking out a loan you can
handle. Make an appointment to see your bank or bad credit
lender a few months or years after the problem in question and
arrange for a small loan.
You should have enough savings to pay for
the loan before you do this. Pay back the loan quickly. It
will not hugely boost your credit score but it will show lenders
that you are having an easier time paying your bills. Taking
out a small loan you can repay is part of the slow process of
reestablishing good credit following a big financial
problem.
Tip #26: Try secured credit if you
cannot qualify for other types of credit
Secured credit is credit or a loan which
uses something as collateral. In some cases, this could be an
asset like a house. In some cases, this collateral could be
money frozen in an account by the bank for just such a
purchase.
If you need credit following a big problem
with your credit score, secured credit may be something you can
qualify for. You can use this secured credit to reestablish a
good credit rating so that you will qualify for other loans in
the future. You may have to pay slightly higher interest if
your credit score is quite low, but in the long term repaying
this type of loan can improve your credit score.
Tip #27: Give it time
Many people believe that simply paying off
debts will improve their credit score at once. This is not
true, unfortunately. If you have experienced a bankruptcy, have
been reported to a collection agency, or have had charge-offs,
the record will remain on your credit report - even after you
have repaid your debts and resolved the problem.
In fact, major problems such as a
bankruptcy will remain on your credit report for seven or ten
years, affecting your credit score. Even if your credit
problems stem from simply not paying bills on time, it will take
some time for the mark to fade from your credit report and for
your credit score to reflect your better repayment.
Paying off your debts and resolving
problems will help your credit score (since overdue accounts
will be marked as “paid” on your credit report), but only time
will remove the mark of the problems from your record entirely.
This means that if you have faced a major
setback such as a bankruptcy, you may have to wait in order to
get the best interest rates on larger purchases. The good news
is that the further away you are from a major financial problem,
the less dire it appears.
For example, if you have declared
bankruptcy, you can expect it to have a huge impact on your
credit score for the first two years, during which time you will
have a hard time getting any credit at all.
However, after two or three years, if you
have been paying your bills on time, then the bankruptcy from
two years ago will matter less because you have been rebuilding
your credit. Your credit will still suffer - but you will
slowly be starting to work your way out of the credit problem.
Persistence and good financial habits will get you there.
This means that if you plan on making a
major purchase (such as a house of car) that may require a loan,
you should start working on improving your credit well in
advance - even years in advance - of your actual purchase. This
is because you simply will not have enough time to radically
alter your credit score in time if you wait too long.
Even if your credit score is already fairly
good, you may need to give yourself several months of time to
boost your credit rating enough to get the best loan
rates.
Tip #28: Contact your banks and ask
credit limits to be reduced.
If your credit risk rating is poor, and
especially if it has taken a beating lately due to non-payments
or other problems, you can ask that your bank reduce the credit
limits on your credit cards, credit lines, and other debts. You
should do this if:
1) You can pay off at least 50% of your
debt loads as they are readjusted. For example, if you have a
credit limit of $5000 on your credit card and get it reduced to
$2500, you should make sure that you can leave a balance of
$1250 or less. If you owe $4000 and have no way of repaying it,
getting your credit limit reduced can actually hurt you. On the
other hand, if you need to get a larger loan and can pay off
your credit card in full and reduce your limit to $2500, you may
be able to improve your credit score in this way.
2) You have lots of credit. If you have
several types of debts and credit accounts - lines of credit,
credit cards, store charge cards, a mortgage, a car loan, and a
personal line of credit - you may be close to overextending your
credit, especially if each of these accounts is fairly large.
You can’t always close down your accounts - especially if you
are still paying your debts off - but reducing the limit may
make you eligible for a loan should you need it.
3) You have some credit but you don’t want
to close your accounts entirely because you have not had credit
for very long. Sometimes, if you have several types of credit,
it is not wise to close them, even if you can, since lenders
like to see long-term relationships with lenders. Reducing the
limits can make monthly payments more affordable and can
actually give you a bigger credit boost than closing
long-standing credit accounts.
4) You will not be taking out a loan very
soon. In the short term, reducing your credit limits may
actually lower your credit rating because your balances will
make up a larger portion of a smaller credit, but in the long
run smaller charge accounts will actually boost your credit
score by making repayment of loans easier and by making you
further from overextending your credit.
Tip #29: Start repairing your credit
right away after a big financial upset.
A big financial problem is an emotional as
well as a monetary burden. Plenty of debtors feel so terrible
about their financial problems and so uncertain about their
money that they go into deep denial, refusing to think or work
on their financial problems. This is likely to only make the
problem worse.
Everybody suffers from financial
difficulties once in a while and every professional in the field
of finance - from loan managers to bankers - knows this. Plus,
financial professionals - including lenders - want your business
and so are willing to work with you to help you solve your
problems.
