The following is a guest post from personal finance blogger John @ Fearless Dollar. If interested in guest posting please contact us.
We live in a world where you credit worthiness is encapsulated in a three digit number – your credit score.
This three digit number, called a FICO score, will dictate how much you can borrow and what kind of interest rates you get in the future. FICO scores range from 300 to 850. If your FICO score is under 600, you need help rebuilding your credit. If your FICO score is under 500, then you really need help rebuilding your credit.
Get a Copy of Your Credit Report – It’s Free
There are three main credit reporting agencies, they are Experian, Equifax and TransUnion. Under the FACT Act you can request a copy of your report from each agency, and it’s free (one per year). To obtain that free report, you must go to www.annualcreditreport.com
Errors are commonplace on credit reports, so this is the simplest place to start in the rebuilding process. Here are some of the more common errors you will find:- Incorrect personal data (addresses, alias, workplace)
– Incorrect balance information (outstanding, credit lines, account status)
– Incorrect accounts (accounts under your name that are not yours)Identify the error, submit a dispute form (from agencies), and send via certified mail to respective agencies.
Too Much Debt Kills Your Credit Score – Pay Down Debt
About 40 percent of your credit score is formulated using outstanding balances. Create a plan to pay down debt.The sensible plan is to attack one debt at a time. Take the credit line with the highest interest rate and pay the most to it. Pay the minimum monthly payment on all other debts. Once that credit line is paid off, move to the next credit line with the highest interest rate.Down goes your debt – up goes your credit score.
New Credit – Be Cautious
Applying for new credit can affect your credit by about 15 percent. People think that rebuilding credit means getting new credit, like starting over. In some ways this is true in respect to reestablishing credit with a secured credit card, but rebuilding also means repairing the credit you have.Don’t be to anxious to abandon your old credit lines with new ones.
Get Back On Track – Pay Bills On Time
Your history of making payments play a big part in credit scores, and if you are rebuilding your credit it means you probably have late payments on file. The good news is, your lender hasn’t closed your credit line.Contact your lenders, explain your situation, and they will be more than willing to work with you. It’s more cost effective for a lender to help you get back on track than put your account into collection – use this fact to your advantage and work with your lenders.
Payoff Balances, But Don’t Close Those Cards
People have a tendency to close accounts once they are paid off, don’t do it.That card, even though paid off, will provide history, which is good for your credit score. There are exceptions to this. If you have several duplicates, such as Visa or MasterCard, then too much unused credit can be detrimental. Keep the older cards and close a few of the newer ones.You can rebuild your credit using these five easy steps – be patient – watch your credit go up, as your debt goes down.