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Simple Steps to Rebuilding Credit

Separating fact from fiction is difficult when trying to research how to improve your credit. Many credit repair companies market on television and radio commercials that they have the secrets to cleaning up credit, but is there really any magic to credit repair? The truth is that consumers do not have a right to force the removal of negative information from a credit report if it is true and made within the time limitations for reporting. While legitimate steps can and should be taken to improve one’s credit, unscrupulous credit repair companies that suggest you dispute accurate credit history or that encourage you to give misleading information on a loan application should be avoided.

The good news is that consumers can follow simple steps to rebuild their credit without having to pay for the assistance of a purported professional. With all the scams and misinformation on the web and in the airwaves, D.I.Y. is often the best policy for credit repair.

Understand Your Credit Report

Before you embark on efforts to improve your credit, you should first take the time to check your credit report. The first step to improving your credit is to understand your credit report. Copies of your credit report may be obtained without charge instantly online from once per year. Once you have obtained a copy of your report, review it for any mistakes or incorrect information. Take the time to follow the dispute procedures included with the report to alert the credit reporting agency of any errors on your report. Be sure to follow up after the disputes are lodged to ensure they are removed timely.

Reduce Your Debt Load

The most difficult part of improving your credit is the most obvious. Reducing or eliminating the balances you may be carrying on revolving debt, in particular, will begin to increase your credit scores. Focus your largest debt reduction payments on the highest interest rate credit cards first while still maintaining regular, timely minimum payments on your other cards and loans.

This part of the process may require real sacrifice to reduce your debt load. If you are like many consumers, your credit card balances likely increased because you were spending more money than your income permitted. To reverse the trend of growing debt, you may have to consider significant lifestyle changes. Significant but simple changes might include committing to no longer eating out at restaurants or dropping a premium cable package. If your expenses are cut as low as possible already, you may need to find ways to increase your income through a second job, a small part-time home-based business, or even yard sales.

Bankruptcy may also be an option if the debt is beyond your ability to manage it. While bankruptcy is a negative mark on your credit, its impact must be balanced against other factors that can more significantly drag down your credit score, such as judgments, repossessions and an overwhelming debt to income ratio. Although the bankruptcy will be noted on the credit report, the debts discharged will show a zero balance.

Start Building Positive Credit History

Once your debt is under control either by pay paying it down or through a bankruptcy, you need a strategy for building a positive credit history. While the most important aspect of improving your credit score is ensuring that you maintain timely payments to your creditors, the following specific steps will also help to boost your credit.

  1. Obtain an installment loan. Remember that the credit reporting agencies care less about how much you borrow and more about how well you perform. Therefore, focus on getting a small installment loan, perhaps even just $1000. Be sure that the loan is from a bank or credit union that will report your loan to the credit reporting agencies. You want your good payment history to be known!
  2. Maintain approximately two to three credit cards. Be sure to keep your balances on each card below 30% of the available credit. As with the installment loans, it matters less how much available credit you have and more that you keep the balances consistently low.
  3. Do not max out your credit cards, even if you pay them off each month. Ideally the credit reporting agencies will see that you are keeping your average balances low. While paying off your credit card in full each month is generally a good idea, you may find that your credit is not improving like you might otherwise think it would if each month you are maxing out your credit limits. This is because your credit cards may be reporting your balances to the credit bureaus in the middle of your billing cycle when the balances are high. To the credit bureaus, your cards may appear to always be maxed out even though you are paying them off each month.
  4. Consider a secured credit card. If you cannot get a standard unsecured credit card, find a bank or credit union that issues secured credit cards. Secured credit cards are typically issued to applicants with damaged credit because the consumer is required to keep on deposit some amount of savings as collateral that will secure the available credit under the card.
  5. Build relationships with your banker. The best place to obtain credit is often at the bank or credit union where you maintain your accounts. Take the time to get to know your local banker. He or she can give you insight into what loan products they have that will best help you improve your credit and that you might most easily qualify for.

The importance of maintaining good credit is often not realized until a person is turned down for a loan. While it is never too late to start improving your credit, taking the time to understand and manage your credit now may save you the frustration and delay of having to rebuild credit later.

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David Cox is a member of NACBA and serves as the Virginia State Co-Chair.
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David Cox named Top Lawyer in Dec/Jan 2017-18 issue of Lynchburg Business Magazine based on peer to peer survey among lawyers in the region.

View of the 2017 Bankruptcy Practice in Virginia - CLE
The 2017 edition of Bankruptcy Practice in Virginia, published by Virginia CLE and co-edited by David Cox has been released. It is the only comprehensive, […]

The following was originally published in Lynchburg Business Magazine, January 2014 issue, and was written by David Cox. For small businesses, receiving a notice of […]

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David Cox was inducted on March 15, 2013, as a Fellow in the American College of Bankruptcy at a ceremony at the Smithsonian Donald W. […]

Virginia Living, June 2013 issue.

An Article by David Cox Featured in the Lynchburg Business Magazine: “Looking for a Lifeboat When Your House is Underwater” As homeowners across the country […]

Virginia Living magazine, April 2012 edition.

Corporate Counsel magazine, December 2011 edition.

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