I noticed someone had recently searched for information the other day about what do to once they were out of debt. An excellent question and probably one I take for granted far too often.
Getting out of debt generally involves digging yourself out or some sort of intervention like bankruptcy. The entire experience can often teach you important life lessons but sometimes people interpret those lessons incorrectly.
For example, following an emotionally painful financial experience people will associate debt with pain. And that’s a logical psychological connection. But that connection is actually not between credit and pain and yet people assume that they should avoid all credit. That’s the wrong conclusion.
Having good credit provides you with significant advantages. Most importantly it affords you the lowest cost of borrowing for important items in your life like a home or car. Trying to rebuild you credit score ten minutes before you need it for one of these important purchases is the worst approach to take. And paying someone to repair your credit is a waste of money.
After getting out of debt or emerging from a consumer bankruptcy it’s important to use some very simple tips and tools to get your credit score buffed up again. I’ve even published this free guide on how to do it.
The reality is the process of restoring your credit is broken into two parts. The first is to look at the information that is being reported about you.
Get a Copy of Your Consolidated Credit Report
Get a copy of your consolidated credit report. It is the type of report that includes all the major three credit reports in one report. I only use a consolidated credit report to check my credit and the link will take you to the credit report I use.
Your credit report is like a report card of sorts. You need to look it over and make sure that all the accounts listed on your credit report are yours. If they were not, you need to write to the credit bureaus that are reporting them and tell them they are not your and ask to have them removed. It’s like you looked at your school report card and it listed classes you did not take. They should not be there.
If the rest of the accounts belonged to you but you had a bad track record with them, that information stays on the report just as if you got a D in a class you took. Just because you got a bad grade does not mean the class is removed from a report card.
After seven years the bad credit items will no longer be reported on your credit report. When you look at your consolidated credit report if any of them list negative information longer than the seven year period, then when you write to the credit bureaus to point out any incorrect information, you can tell them about the old items.
Generally the credit bureaus are good about automatically removing the old items.
While you are at it, look for any delinquent accounts that may be younger than seven years old. If you have any, pay them off. The contact information for the creditor will be on your credit report.
I also recommend you get a free account on Credit Karma so you can use the free credit simulator to see how changes to your balances or accounts will improve your credit score. This way you can plan what actions to take first to get the maximum improvement.
Next step is to get a couple of secured cards to use to rebuild your credit with. A secured card is not an extension of credit. Typically the credit limit is based on the deposit you place with the bank as collateral and when you decide to close the account you will get your money back.
These banks typically report your monthly usage and payment to the credit bureaus and unsecured major credit cards are the quiets way to rebuild your credit.
Boosting Your Credit Score With Good Credit Using a Secured Card
Using the report card analogy, if you wanted to bring up your GPA you would need to earn some better grades to do it. It is the same with your credit report. If you want to bring your score up you need to start having new and good credit reported about you.
The best way to do this is to get and use a secured credit card. In fact get two different ones. I put together a section of the site that lists reviews for secured cards. Look at the secured cards here.
The advantage of getting a secured card is that you will get the credit card and not get a rejection on your credit report that will further hurt your credit. A rejection can be easily spotted by looking at the inquiry section of your credit report and seeing there is not a corresponding card opened. And with your current bad credit, if you applied for an unsecured card, you would get rejected.
The reason you will get the secured credit card on the first attempt is because you need to put up a deposit with the bank that is equal to your credit limit. The deposit will earn you interest and in the unfortunate event you were unable to pay your card and defaulted, the bank would use your deposit to pay the debt.
When looking for a secured card you want one that will report to all three credit bureaus. This is key. We need your new good payment history reported.
Now when I say use the card, you do not need to carry a balance from month to month. Just use the card for regular purchases and pay the card off either immediately or at the end of the month.
Also, if you get a secured card with a $300 limit, never have more than 35% of the limit on the card. Even though your initial limits may be low, you don’t want to max them out. You can always increase your limits by increasing your deposits. You can increase your credit limit by increasing your deposit with the card company.
I suggest getting more than one card so you can get as much good juice flowing to your credit report without having too many credit cards open. You could actually go with three if you wanted to, but no more than that.
Just make sure the card will report to the credit bureaus.
Using this approach you are not going back into debt but repairing the tough history you previously had and prudently preparing for a time in the future when you might need to depend on your good credit again.
I find the worst mistake people make after getting out of debt is to simply stick their head in the sand and avoid credit entirely. But let’s get smart about this and avoid the right thing and that’s the unmanageable debt, not the credit.
Don’t be afraid of being reward by having good credit, just avoid taking on too much in the way of financial obligations you are bound to repay based on your current income. There’s absolutely nothing wrong with living within your income.