If you’ve experienced some financial difficulties, chances are your credit rating may have suffered also. Don’t despair. Time tends to heal credit wounds as well as emotional ones, but you’ll also need discipline and patience. Even if you’ve suffered a major financial event, such as a foreclosure, your credit rating could rebound in as little as two years.
Order copies of your credit reports. You can’t fix your credit unless you know what’s wrong with it. You have the right to obtain your credit report at no charge once a year from all three major credit reporting companies. There are a number of websites offering this service, but there is one sponsored by the credit-rating companies: www.annualcreditreport.com . When you receive your report, use the guide enclosed to understand what is most damaging your credit. Start by reviewing whether there is any incorrect information on your report. If so, contact the company immediately so that they can correct the errors. Common issues that tend to impair credit are late payments, bankruptcy, or a court judgment against you.
List your payments for debt. Payments for loans, credit cards, and mortgage need to be paid on time every month to avoid further damaging your credit. Credit-card payments should exceed the minimum payment, as this amount is also calculated in your credit score. Be sure you can afford your rent (or mortgage) or car payments. Not making timely payments is harmful to your credit rating, it leads to financial difficulties from which there may be no return. If you struggle each month to pay just these two things, it’s time to downsize.
List your expenses. Using your credit card and bank statements, make a list of all your expenses. Budget so that you no longer use credit cards until your credit rating improves. This may mean making some difficult sacrifices. By forgoing buying Christmas gifts, perhaps you’re giving yourself long-term financial freedom.
Call a credit-counseling service. Credit-counseling services offer more than just budgeting advice. They can also help you to determine your options and speak with creditors on your behalf. Some can negotiate lower interest rates and manageable payment plans. Be wary, though. Some services charge hidden fees and give bad advice. The U.S. Trustee’s office provides a list of credit-counseling services that have been investigated and approved. Go to http://www.justice.gov/ust/ before choosing a service.
Stick to your budget. It takes discipline and time to restore your credit rating. A misstep can set you back to square one. Remember that unexpected events will come up, so you’ll need to set aside enough to cover emergencies such as car or home repairs.
Sara Huter is a professor of economics. Her background also includes risk management in the banking and energy industries with expertise in credit scores. Huter received an M.B.A. in finance from Texas A&M University and a B.S. in information systems from Kansas State University. She has been writing for over five years with work at Popsyndicate.com, WickedWordSmith.com and Simplejoy.com.