Three Ways to Rebuild Your Credit

Tuesday, February 6, 2018, 6:00 AM | Leave Comment

People hurt their credit in a number of ways, and unfortunately it’s much easier to damage your credit than to repair it.

Missing payments, failing to budget, and misusing credit cards are some of the most common ways you could end up in a bad situation with your credit.

In order to identify past and ongoing problems, let’s take a more in-depth look at some of the ways you might hurt your credit as well as strategies for rebuilding your credit score.

  1. Make Consistent House Payments

    Whether you’ve found the house of your dreams or you’re financing a fixer-upper, one of the most important things you can do to rebuild and maintain your credit score is to make consistent payments every month.

    Likewise, missing deadlines, failing to make payments, or defaulting on your mortgage is one of the quickest ways to tank your credit score. While it can take months or years to rebuild your credit, a single 30-day late payment can cause your score to drop 40 to 80 points.

    Although listing a foreclosure on your credit report may not reflect as negatively as outright bankruptcy, failing to make payments on your mortgage and losing your home is nearly as bad from a lender’s perspective.

    In the long term, this could prevent you from financing important purchases, or it could cost you hundreds or thousands of dollars over time if you’re forced to take out loans with higher interest rates.

    If you’re having difficulty making payments on time, there are a few ways to make the loan more manageable. Refinancing your mortgage is often the best way to negotiate a lower monthly payment, a lower interest rate, and a different length of time to repay your loan.

    Lenders aren’t likely to offer lower interest rates to people with poor credit, though it is possible if you can prove you have substantial savings or if you find a family member, partner, or friend with good credit who will agree to co-sign the new loan.

    Another option for people with poor credit is to recast the loan. Many lenders will allow you to recast your loan so you make smaller payments over a longer period of time without changing your interest rate. In the long term, this could cost you more in interest over the life of your loan.

    However, recasting can have a major impact on your immediate cash flow, allowing you to make your minimum payments every month and avoid further damaging your credit. This may cost a fee of a few hundred dollars, and you may also need to make a lump sum payment to lower the principal balance of the loan in order to qualify for recasting.

  2. Stay Ahead of Your Car Payments

    Along with a house payment, it’s likely you’re also paying down a loan on your car. The recurring costs of utilities, groceries, and other basics can quickly eat away at your finances and may even prove to be beyond your budget when emergencies or other unexpected expenses come up.

    Even fluctuating fuel prices can suddenly push your budget beyond the limit. One of the best ways to ensure the overall costs related to your vehicle stay within their bounds is to follow a regular maintenance schedule.

    Though your car is likely the second biggest investment you’ll make, many people choose not to worry about their vehicle until something goes wrong.

    For example, you may not want to shell out the cash for an oil change, supposing you can stretch your last oil change a bit farther in order to save a little money now.

    Yet when you compare occasional maintenance charges to the price of replacing major parts, you can see why it makes sense to pay a little now to keep your car running. This concept also applies to safety features, which may seem less crucial. This includes something as subtle as repairing a broken tail light or choosing tires with proper tread for the weather and terrain where you live.

    By neglecting these, you may save money now, only get into an accident later. Suddenly you’ll have to pay more for repairs, property damage, and higher insurance premiums.

    If you default on your car payment, the lender may decide to repossess your vehicle. This will cause a huge drop in your credit score, and you may still owe money to the lender.

    It’s best to reach out the lender before this happens. They may grant a forbearance or deferment period, allowing you to reduce your payments temporarily or move your few payments to the end of your loan repayment schedule.

    Lenders don’t typically want to repossess a vehicle, so contacting them early on and continuing to communicate is the best way to avoid losing your vehicle.

    For whatever reason, if it simply isn’t possible to keep up with your car payments, you should research whether you have equity in the vehicle.

    If the value of your car is more than the amount you owe on the loan, you have equity. In this case, you may be able to sell your car quickly to a car dealership, paying off your loan and avoiding the damage you would do to your credit for additional missed payments.

    If you owe more on the loan than your car is worth, the loan is referred to as “upside down.” This makes it much more difficult to break even, and you may need to pay the difference in the value of your car and the amount of your loan up front.

    While it may not seem like a viable option to give up your vehicle, this may be the only way to lessen serious long-term damage to your credit.

    You may need to get creative with how you make your commute to work and other locations, which can make life difficult in the short term. However, if you can find a way to make the situation work, you may stand a better chance of maintaining the credit you have and improving it through other payments you make consistently.

  3. Create and Follow a Budget

    This strategy is useful for anyone, regardless of your credit score. However, as the previous sections suggest, if you’re trying to rebuild your credit, you can’t afford to miss any recurring payments. Thus, a budget becomes essential to living within your means and maintaining a consistent payment schedule month to month.

    Online banking makes it easier than ever to check on your balance in real time, yet many people assume this alone will keep them out of financial trouble. Then, at the end of the month, funds start to get low and some fixed expenses still haven’t been paid.

    While keeping a close watch on your balance is a step in the right direction, tracking past purchasing habits can help you allocate certain amounts of money to more sporadic expenses like entertainment, clothes, and groceries.

    A variety of digital finance tools can help you to document and track expenses, allowing you to budget more efficiently. For example, you can use an app to scan your receipts for everyday purchases.

    Some of these apps will automatically pull data from the documents you scan and provide information about your spending habits. This can help you to identify areas that might be taking up more of your budget than necessary.

    The purpose of creating a budget and paying attention to trends in your spending isn’t to cut out every non-essential thing you buy. Rather, it can help you decide how much room those items should safely take up each month, so you can enjoy how you spend your money with the confidence that you aren’t risking your credit.

    Along with tracking expenses, it’s important to avoid relying too heavily on credit cards to get through the month. Even if you’re paying off your balance on time every month, credit bureaus track your spending behavior.

    Part of your credit score is determined by how much you owe. The amount of your credit limit you use is called your credit utilization ratio, and if you’re using most or all of your credit limit month to month, your credit utilization ratio will be high.

    Credit bureaus will take notice of this, and your credit score will fall. Though using a credit card and paying the balance can help raise your credit score, it’s best to keep your credit utilization ratio below 30 percent.

It takes time to raise your credit score back to where you want or need it to be. Depending on the previous status of your credit and your goals for rebuilding it, this could take months or years.

Even when you raise your credit score with positive strides, negative information may remain on your credit report for 7 to 10 years, offsetting your efforts at reparation.

Patience and consistency are the most important aspects of rebuilding your credit. If you are willing to pay attention to your finances and put in the time to prove a positive history, bad credit doesn’t have to be a lifelong burden.

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