6 Dead Simple Steps to a Healthier Credit Report

by Jamie Simmerman · 9 comments

Repairing your credit after a bad financial spell can be a difficult and tedious process. The steps are long and confusing and facing your financial failures and foibles intensely for a long period of time leaves you overwhelmed and blue. If part of your New Year’s Resolution is getting your credit score back in the healthy range, try these easy to digest steps this month.

6 Easy Steps to Get Your Credit Back on Track
Step #1: Set the right tone with a good attitude. Any credit repair begins with admitting you’ve made mistakes in the past, but you’re committed to making positive changes now. As you examine your credit report, keep in mind that while you can’t change the mistakes you’ve previously made with your money, you can start new habits and stop beating yourself up over what cannot be changed. Steel yourself with a pep talk, and print several copies of your credit report.

Step #2: Make special note of any inconsistencies and all inquires reported. Credit report mistakes are very common as are unauthorized credit inquires. Make a detailed list of any and all suspicious entries, including any inquiries that you did not personally authorize. This list should be sent to credit bureau as a formal dispute, explaining the listed entries are “highly injurious” to your credit report and should investigated for removal. If you use this terminology, any contested entries that the credit bureau cannot verify within sixty days of receiving your formal complaint must be removed from your credit report. It is important to include unauthorized inquires on your list as these can take up to a year to be removed without your intervention, and any inquiry that does not result in a new line of credit can be cause for refusal of future credit. It may take four to six weeks to hear back from the credit bureau.

Step #3: Once all false information is removed, you should make a list of any remaining valid entries, and contact your debtors directly to make arrangement for payment of any outstanding debt. They may offer a payment plan, a settlement, or both in exchange for withdrawing the entry on your credit report. There are consumer credit agencies that provide this service for you for a fee, but most consumers can successfully arrange the same types of deals with creditors and avoid paying the credit agency’s fees. Make sure to get the payment agreements, datem and the name of the creditor in writing before sending any money for such a plan. This helps protect you from further discrepancies and provides proof of the deal should the entry remain on your credit report after payment is made.

Step #4: If you have overwhelming credit card debt, try paying the minimum amount possible on all cards except one. Take the credit card with the lowest balance and pay as much as possible every month on that card until it is paid off. Then, take the money you were paying on the first card and put it toward the next lowest credit card. The exception to this process would be if you have one particular credit card with a higher interest rate. This card should be targeted first to prevent escalating balances from paying the minimum due every month. If your credit card balances are similar, pay off the lowest balance card first. This process creates a sense of accomplishment and knocks one credit card off your credit report sooner than trying to juggle paying off all your outstanding cards.

David’s Note: The method described is what works for Jamie. You may want to check out the difference between the two competing debt snowballs philosophies: highest interests and smallest loans first before you decide which method of paying off your debt you wishes to pursue.

Step #5: The only way to repair your credit is to use it. While this seems a little counterproductive, creditors want to see that you are capable of managing your money effectively and paying your bills on time before they extend a line of credit to anyone with a shaky credit history. Apply for a secured credit card, a merchant card, or a bank credit card. Forget about 0% balance transfer credit cards because you won’t be approved for them yet. If you can’t obtain one of these due to your previous credit, try purchasing something from a rent-to-won store and use them as a credit reference. You can also place something on layaway at a retail store, make regular on-time payments, pay off the balance within a month, then apply for a store credit card. Your layaway recepts prove your trustworthiness, and a personal interview with the credit manager may secure you a store credit card. You can apply for a credit card from providers such as Fingerhut, WalMart, BP Oil, Citibank, Orchard Visa, or the National Wholesale Company.

Step #6: Use your new credit responsibly. Identify your weaknesses that led to your financial problems in the past. Do you have difficulty making payments on time, budgeting your money, controlling impulse spending, or keeping an accurate bank account balance? Unless you know what your weaknesses are, you are setting yourself up for repeat financial failure. One method to try is setting up a special account to build your new credit. Place a couple of hundred dollars into this account as a cushion, and set a monthly budget to spend. Have this amount direct deposited into the account from your employer every month. You then have the freedom to spend your budgeted amount every month, knowing you can pay off the entire balance with the funds from your credit building account. You can even opt to have payments set up as an automatic draft every month if you have difficulty remembering to place a check in the mail on time. You can also choose to charge items such as gasoline and groceries to a credit card, and place the cash you would normally use to pay for such items into a special envelope or bank account to pay off the credit card balance every month.

Rebuilding your credit can be slow and difficult, but setting small goals and being diligent about making positive lifestyle changes can create lasting change in your financial state. If you’ve had success in rebuilding your credit score, what tips do you have for others who are struggling to make a difference?

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{ read the comments below or add one }

  • AJ says:

    Thomas, if you do not carry forward a balance then the APR is unimportant. Once you carry forward a balance is when they charge interest every month till just about forever.

    What is important in your case is the annual fee. Many have no annual fee but carry a high APR. If you are confident that you can pay whatever you put on it in full and on time, you should be fine with a zero fee/high APR.

    Good luck.

  • Thomas says:

    I decided to try and rebuild my credit by getting a credit card to use once per month and then pay it off right away. Well I’ve been turned down by many credit card companies and I make and OK wage and do not have hardly any debt.

    Am I going to just have to accept a credit card that has a high APR?

  • Marbella says:

    To get control over their credit card debt requires that the person is 100% willing to get their finances in order and do not say that some cards are more important than others.
    I say the same as the Sun does; Conventional wisdom would be highest interest rate card first.

  • I think these are all great steps and advice but I take serious issue with the idea of buying anything from a rent-to-own store. The interest rates that end up being charged to customers who pay over time are so astronomical that I really don’t see even one ounce of benefit to buying something here simply to improve your credit. Buy less and pay off more, and in the meantime, your credit will be improving enough to the point of being approved at least for a retail store credit card, which you can pay off each month, and where the merchandise will be newer and of a higher quality than something from a rent-to-own store. If the rent-to-own store is the only place you can get approved credit, you should not be buying anything, even if you plan to pay it off in the first statement.

  • MyOhMy says:

    Having previously worked for a store credit card company I can assure you that most store cards are ran by banks and there is absolutely nothing a sales rep or store manager can do to get you approved for a card. Debt-to-income ratio matters in credit scoring so perhaps it would be best to pay most if not all debt off before trying to borrow again? Depends on the individual but learning to live on what you earn may be key in avoiding bad credit in the future.

  • Jeff Crews says:

    I try to limit my credit card spending. Although, I could probably benefit with many of the rewards out there. What are your thoughts on credit cards with annual fees?

  • AJ says:

    Sun,

    Watch out on the terms of the teaser cards. Does it put the riser % on the entire balance from day one if not paid off by the teaser period? That’s how Same As Cash usually works. The devil is in the details.

    I read Dave Ramsey too and understand why he says smallest balance first. Since I’m not in over my head, I have chosen to snowball the highest interest rate first. His debt free advise is geared toward those with spending or large debt issues.

    • Sun says:

      > teaser cards

      It is rare to find a card that will give you a 0% balance transfer for the life of the balance. Most that I run across take the balance to the new rate after the teaser period ends. The point, then, is to pay off a higher interest rate during this time… you’d have to do the cost analysis if you do not expect to pay off all your debt and how much interest you would pay after teaser rate ends.

      > His debt free advise is geared toward those with spending or large debt issues.

      I think his advice applies to anyone with debt, large or small. His advice is very simple and it scales well.

  • Sun says:

    Step #4 – Conventional wisdom would be highest interest rate card first. Dave Ramsey would say lowest one first regardless of APR because of the psychological benefit of earning momentum in your debt snowball. I would only add that if you have a 0% APR teaser card, you can buy yourself 6 to 21 months of 0% APR. I would leave that card alone and attack the debt of the other credit cards. You can re-evaluate once the teaser rate is gone based on highest interest or balance owed.

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