How to do it in these tricky times
A single misstep can hurt your credit score for years. That could make it harder to obtain a new mortgage, car loan or credit card at an attractive interest rate, especially during the lingering credit crisis.
Fortunately, you can recover most of your lost credit score points in as little as three years — if you make some smart credit moves. What to do to restore your credit rating…
GET A SECURED CARD
One of the best ways to rebuild damaged credit is to use a credit card responsibly. If there’s a recent bankruptcy or an unpaid bill on your credit report, however, you may no longer qualify for a traditional, mainstream credit card.
You will very likely qualify for a “secured” credit card. These are available to virtually everyone, regardless of his/her credit score. The catch: You’ll have to make a deposit with the card issuer in advance that is equal to the secured card’s credit limit.
The card issuer — a bank or a credit union — might be willing to return your security deposit and convert your account to a standard unsecured card in a year or two, assuming that you have made all of your payments on time.
Credit card comparison Web sites, such as mine, Credit.com, can help you identify attractive secured card options.
Example: Applied Bank Secured Visa Gold card, $200 to $5,000 deposit/credit limit, 9.99% annual percentage rate (APR), $50 annual fee. 888-839-7952, www.appliedbank.com.
Caution: Secured cards from some issuers charge such steep annual fees and sign-up fees that virtually the entire credit limit is used up by these fees before you use the card. Avoid these.
To make sure that your credit rating gets the full benefit of your responsible secured card use…
Confirm that the card issuer reports to all three credit bureaus — Equifax, Experian and TransUnion — before signing up.
Don’t confuse your secured card security deposit with a payment. Some secured card users assume that the card issuer deducts their charges from the money they already have on deposit, so they don’t bother to pay their bills. In truth, if the issuer must dip into your deposit, it will report your bill as unpaid, adding another black mark to your credit report.
USE CARDS LESS
Pay off your secured card balance — and other revolving credit balances — in full each month. This will save you steep interest payments and could dramatically improve your credit score.
About one-third of your credit score is determined not by your payment history, but rather by the percentage of your available credit that you currently use, and lower is better.
Ordinarily, carrying a small balance on a credit card would not have a dramatic effect on your credit score — but if you have recently made major credit missteps, it could. Why? When your credit rating dropped, your credit issuers likely reduced your credit limits or revoked your credit. Perhaps your only credit card now is a secured card with a credit limit of less than $1,000. If your total available credit is low, carrying any balance means that your credit-utilization percentage will be too high, taking a major bite out of your score.
Helpful: Stop using your credit cards during the two months before you plan to apply for an important loan. Any balance present on your previous month’s statement will probably still show up as your current balance on your credit report. You have to give the credit bureaus time to cycle through any statements with balances. Two months should be sufficient time to have a zero balance reported to the credit bureaus.
BECOME AN AUTHORIZED USER
If a close family member names you an “authorized user” of one of his credit cards, that credit account will be included on your credit record and can help raise your credit score. Make sure the account has a low balance… a long history of on-time payments… and, ideally, a high credit limit. Becoming an authorized user of an account with a history of missed payments or a high credit-utilization percentage could lower your credit score.
Your relative does not have to give you access to the credit card itself. Just naming you an authorized user of a credit card will not affect the relative’s credit score.
Update: Fair Isaac, the company that calculates the well-known FICO credit scores, recently altered its scoring rules to prevent abuse of this “authorized user” strategy. Fair Isaac will not divulge the new rules, but it appears that the strategy still will work as long as the credit card account to which you are added belongs to a close relative, such as a spouse or parent. Fair Isaac is trying to prevent credit-repair companies from adding their clients to the accounts of total strangers in exchange for fees. The new rules have not been adopted by all three credit bureaus, so for the time being at least, there still may be some benefit to being added to the account of someone other than a spouse or parent, such as a close friend.
NEVER DO THIS
Some well-known credit-repair strategies are best avoided…
Do not take out a car loan — or any other loan — simply to boost your credit score. Managing a loan responsibly could benefit your credit score, but this benefit is not worth the high cost of unnecessary loan payments.
Do not hire a credit-repair firm. Some of these are scammers that charge you a monthly fee but do nothing for you. The rest just submit letters to credit-reporting agencies on your behalf challenging the validity of negative listings on your credit report. If there are inaccurate listings on your credit report, you can challenge them yourself for free. Go to Credit.com, and click on “Learn How to Manage Your Credit Scores.”
Do not hire a “debt settlement” company. It will try to convince your creditors to accept less than the full amounts that you owe. Even if your creditors agree to this, they will report your debts as “settled,” which is not the same as “paid in full.” Your credit score will suffer.
Better: If you have debts that you genuinely cannot pay, contact a nonprofit debt-management company affiliated with the National Foundation for Credit Counseling (800-388-2227, http://nfcc.org). These organizations try to convince creditors to reduce interest rates and void late fees, but — unlike debt-settlement companies — they will not ask creditors to accept less than the full amounts borrowed. If your creditors agree and you make your payments on time, your credit report will not suffer lasting damage.