5 Ways to Rebuilding Credit History
You've decided it's time to repair your credit. Most people immediately think about all the collections, medical bills or charge offs on their account. Yes, those will have to be dealt with if you want to have a clean credit profile, but how important is rebuilding credit? This is the most overlooked portion of rebuilding credit. It accounts for over 50% of your credit score and without it, nearly impossible for you to get any real credit momentum.
You have to think of it this way, rebuilding credit is what rebuilds your credit score. Payment history, credit mix and length of credit, accounts for 60% of your credit score. So in theory, you can delete all the items you can, but without the rebuilding portion it is difficult to get those needed score increases. Don't get me wrong, the deletion are a necessary evil, but let's focus on the rebuilding portion. Use these 5 ways to start rebuilding your credit history.
Become an Authorized User
This might be the simplest way to boost your credit scores. Find a close friend or family member and become an Authorized User on their credit card account. No, they don't actually have to give you the credit card! You are just using their credit history to your advantage. What are the main things needed so this actually helps your credit scores? First, the longer the account has been opened the better, length of credit history is 15% of your score. Second, make sure they do not have any late payments on that account or it could impact your score negatively. Last would be credit utilization, ensure the card is not maxed out and below 30% of the available credit limit. Bottom line is you have to ask some hard questions, but make sure if you are being added as an Authorized User to an account in excellent standing.
Pay Debts On Time
Paying your bills on time is a must. Yes, we understand you already know this, but want to emphasize the damage late payments have to your credit. Think about this, if you are trying to get a mortgage, most lenders will deny the loan based solely on late payments. An underwriter is looking at the last 24 months of payment history. Every lender is different but 4 or more looks substantial to them. Some credit furnishers will do a one time late payment forgiveness but multiples' are difficult to get removed. Remember one late payment can drop your credit scores up to 45 points.
The 30% Rule
You will hear many opinions on the percent of credit utilization that should be used. I will say this, pay your credit card to a zero balance every month if you can. If that is not a possibility, try to never charge more that 30% of the credit limit on any card. People get confused, even if you max your credit card out every month and pay it off, it could hurt your credit score. This is because the credit bureaus might report the balance before it is paid in full. By never charging more than 30% will ensure it is reporting a lower balance. You will see up to a 30 point increase in your credit score over a 90 day period by leaving the utilization below 30%.
Get a Secured Credit Card
A Secured Credit Card might be the only way to open a revolving credit account if your credit scores are really low. Yes, you have to pay a security deposit but the benefits to your score over the first six month is amazing. You will likely get a 15-30 point credit increase the month it reports. We discussed it above, but if you do open a secured card make sure you follow the 30% rule.
Get a Credit Builder Installment Account
Having a mix of credit on your profile is a must when rebuilding credit. The different types listed on your report are revolving accounts, a credit card and an installment account like a car payment. In order to get an installment type account on your credit profile we recommend an Installment Savings Account. This is basically a savings account that reports on time payments to the credit bureaus. You will deposit money once a month into an Installment Savings Account and they will report it to the credit bureaus. The great thing is, it's a real savings account and you get all the funds back. It is cancel anytime, if you choose to stop after only 3 months you still receive back all monies deposited. This type of account is beneficial because it forces you to save money instead of buying things you do not need just to rebuild credit.
Keep Up the Struggle
Rebuilding your credit profile can seem daunting. One main tip is to continually monitor your credit to ensure there is nothing out of place. Deletions are important but rebuilding credit is key to longterm credit strength. Hang in there, improving your credit scores and financial position take time and patience. It's definitely not an overnight thing and if some credit repair company tells you so, run. The bottom line is it took years to damage your credit, so take the time, make the right choices moving forward and better credit will come.