Why does it matter?
Your credit score determines your creditworthiness, which in turn determines if you are likely to get approved for a loan and what the rate will be on that loan. For poorer credit score this usually means extra money down to entice the banks, and a higher interest rate. This, in turn, means a larger payment (as your paying more interest) and the possibility of being upsides down in your vehicle.
How To Build Credit
Everyone has to start somewhere with credit and everybody starts with nothing. Sometimes having no credit can prove to be just as difficult as having bad credit. If you can’t get a loan, how are you supposed to show history? Here are some easier options to try;
- Apply for a pre-paid credit card/secured credit card. You may need to provide some cash up front as collateral but you will get this back when you close the account. Use it for at least six months so it is reported to the credit bureaus and by this time it should show good creditworthiness (as long you pay it back.) Use it often for smaller purchases (like gas-something you’d spend money on anyway). If you can, pay off the entire balance every month but at least make a payment towards a big chunk.
- Get a co-signer. A family member or someone who trusts you to make the payments and has good credit. Be sure that the co-signer is responsible for the loan should you default/miss a payment.
- Get authorized on someone else’s credit card. This is going to have to be a very good friend or family member. You will have all the perks of a regular credit card holder and it will be reported to the credit bureaus.
- Avoid applying or opening lots of new accounts at the same time.
Check your score after six months. Some lenders such as Capital One and Discover offer free credit score access when you have an account with them. There are other third parties online that also offer free credit score checks. Be aware that not every score will be reflected in the same way and may differ but it will give you a pretty good idea. Check for mistakes too. They DO happen!
How To Rebuild Bad Credit
Check your credit score and make sure there are no errors.
It kind of goes without saying that if you pay your bills on time, this will have positive effects on your credit score, however sometimes emergencies happen and it’s not always possible. Try not to borrow beyond your means. Just because were approved for a loan, it might not always mean you can afford it. There are certain bills that do not report to credit agencies such medical bills (unless it goes to collections) Do everything in your power to avoid bills going to collections. Sometimes a phone call to the company and explaining your situation may mean they will work with you or give you extra time. Not always the case though.
Give priority to the bills that ARE reported to the bureaus along with utility bills.
Pay off any outstanding collections. Call the collections company and ask what they will settle for. Most of the time this is less than the actual amount owed. These have one of the biggest impacts on your score so when you pay them off, they will eventually count for less. Check and see when they have last been reported though. If they have recently been reported (you can find this out on a full credit report) then pay them. If it hasn’t been reported for a couple years then chances are, it’s not having as much of an impact.
Do not close all of your accounts.
Pay off cards as much as you can but keep using them (for smaller amounts and make bigger payments)
Some of the online companies that offer free scores also offer a score simulator. This is a really useful tool so you can play around with your accounts and see what happens to your score if you were to pay it off or keep making payments.
Try not apply for any new accounts until it’s rebuilt. Each inquiry (application for a loan) has a negative impact on your score.
Pay off accounts instead of moving around. Moving money around to better rate credit cards may help in the short term but it will show as a new account and will show up as available credit. Then, of course, you may send the money and end up in a worse situation.
Avoid store cards with plague. They usually have insane interest rates.
Wow that’s a lot and there’s more to it as well.
Do you have tips for rebuilding a score? Let us know…