Bad credit can happen to good people. The tough economic times in recent years led to an increase in delinquent loan payments, bankruptcies, vehicle repossessions and home foreclosures, even amongst people who normally managed their finances very well. These problems are serious and cause major damage to credit reports and scores, but these circumstances are still workable and can be improved. If you are in a situation where you want to reestablish positive credit but are not sure where to begin, here are a few steps you can take right now to start your credit score moving back in the right direction. Know where you stand Although it might be difficult to acknowledge the state of your credit, if you don’t know what’s on your credit report, you won’t know the steps you need to take to improve it. You can access your credit reports from the three major credit bureaus (Experian, TransUnion and Equifax) for free once a year at www.annualcreditreport.com. Review your credit reports and be sure everything listed there is accurate. If you notice any errors, contact the credit bureaus to file a dispute. These free credit reports will not include your credit score, but they will give you a comprehensive picture of the factors currently impacting your score. There are free credit score estimators available online, but if you’d like to find out the actual credit score used by lenders — typically your FICO credit score — you’ll probably have to pay for this service. Make a plan Once you know the current condition of your credit, it’s time to come with a plan to improve it. If there are delinquent loans or items in collection on your credit report, begin by creating a realistic approach to paying these off. Your payment history is the biggest factor in calculating your credit score, so it’s imperative you address any payment issues as soon as possible. Late payments and paid collections on your credit report aren’t ideal, but they definitely reflect more positively on your credit than unpaid loans or collections. Don’t be afraid to seek assistance with this step! Contact your creditors directly to see if you can arrange payment plans, and I also recommend working with a nonprofit credit counseling agency to establish a budget and develop a plan to get your credit back on track. Start small Reestablishing your credit can be like starting over from scratch, so don’t take on too much right away or create a plan that will be impossible to maintain. Focus first on paying current any delinquent debt you may have and on maintaining on-time payments for all your accounts, including accounts other than loans and credit cards. Don’t forget that just about any type of bill may be reported as delinquent to the credit bureaus and harm your credit score if you don’t pay it on time, including bills related to medical costs, utilities, your cell phone, insurance, taxes and gym memberships. If you don’t have any unpaid delinquent accounts on your credit report but also don’t have any open loans to help you establish positive payment history, consider opening one low-limit credit card to help demonstrate you can handle credit responsibly, and plan your budget so you pay this card’s balance in full every month. The potential issue? Positive credit history is often required to receive new credit. If you don’t qualify for a standard credit card with reasonable terms, I suggest contacting a trustworthy financial institution to see if they offer a secured credit card option. This typically requires you to deposit money equal to your credit limit and may provide you with the opportunity to upgrade to an unsecured card once you’ve maintained a positive history for a set amount of time. Stick with it When it comes to repairing and reestablishing credit, beware of quick fixes and credit repair scams. Set yourself up for long-term success by creating a realistic plan and making your payments on time, every time. Take advantage of the help available from reputable credit counseling agencies and your bank or credit union, and utilize services such as automatic payments or payment reminders to keep your payment history on track. Repairing and reestablishing credit takes time, but the payoff for your patience and diligence will be well worth it.
April Clobes is Executive Vice President/Chief Operating Officer for MSU Federal Credit Union in East Lansing. She can be contacted by e-mail or by calling (517) 333-2254.