For struggling credit card holders, a poor credit score that is left unaddressed often outlives the events (foreclosure, bankruptcy, unpaid credit card bills, etc…) that triggered it in the first place. The importance of a healthy credit rating cannot be overestimated: A credit check is performed for mortgage, credit card, car loan, home loan, insurance, or employment qualification. As indelible as it might seem, however, a bad personal credit history can be wiped out and a good rating re-established. With a little patience and perseverance, borrowers can effectuate a credit history repair.
The most successful methods for achieving a credit repair are as follows:
1. A compromise repayment plan
Consumers wrestling with credit card debt should not hesitate to discuss their financial plight with their lenders. This is because the majority of creditors extend short-term hardship programs that lower debtors’ monthly payments. Borrowers could, for instance, negotiate an affordable repayment plan that will settle 30-40% of outstanding balances, an arrangement that is acceptable to most lenders. Creditors are willing to accept a partial settlement, since it is preferable to not receiving any payment at all, in the event that the borrower files for bankruptcy.
Upon payment in full of the settlement, the debtor must obtain a settlement letter documenting the poor credit repair. He or she will then mail a copy to the three credit bureaus (Equifax, TransUnion and Experian) for purposes of updating the credit report so that it reflects the paid settlement.
2. Timely bill payment
It is primordial that borrowers make their payments on time since payment history is the leading factor in the calculation of credit score, constituting more than one third (35%) of this indicator. Late payments adversely impact a consumer’s credit card rating.
3. Paying off debts
The total outstanding debt comprises almost one-third of a debtor’s credit score. To improve credit, card holders should get current on their delinquent accounts. They can do so by paying the minimum amount due in a timely manner to each creditor. After applying any left-over funds to the lowest outstanding balance, credit card borrowers should “snowball” their payments to the next lowest balance.
4. Keeping delinquent accounts open
Consumers should not close accounts with balances since this will negatively impact their credit. Rather, consumers should opt for high credit limits and maintain low balances. By doing so, they will demonstrate to lenders their ability to manage high balances. Borrowers can boost their credit rating by paying off a high balance.
5. Keeping a few accounts open
Since frequent closings of numerous accounts is regarded as a sign of financial instability, credit card holders should not close more than one or two accounts semi-annually. Preferably, the two oldest accounts should remain open, since length of credit history is the third most important factor in credit score computation.
6. Cease using credit cards
Consumers immersed in credit debt should cut up or avoid using their cards and strive to pay at least the minimum on each account.
7. Closing unused accounts
Debtors should only keep open a couple of accounts to reclaim credibility in the eyes of creditors by proving their responsible usage of credit. After closing superfluous accounts, borrowers should inform the credit-reporting agencies of the status change.
8. Holding off on additional credit applications
Consumers trying to repair their credit history should refrain from submitting more credit card applications, since this will lower their credit score. The number of inquiries that a lender makes vis-a-vis a prospective borrower’s credit report determines 10% of the credit score.
9. Reduction of credit limits
Debtors should ask their lenders to lower the credit limits on their accounts. Creditors take into account the total sum available credit even if the customer is current in his or her payments.
10. Co-signing a credit card or loan
Consumers should consider getting a friend or relative to co-sign on a credit card or small loan. By making timely payments on co-signed credit, debtors will be able to rebuild their credit rating.
11. Obtaining a secured credit card
Another way that borrowers can reestablish their credit is by using a secured credit card, which works as follows: A debtor supplies the funds up front by placing a specific amount of money in an account. Whenever he or she charges the card, the funds are tapped from his or her account. With each timely payment, credit repair is furthered.
12. Cleaning up the credit report
Pursuant to the Fair Credit Reporting Act (FCRA), borrowers are entitled to dispute erroneous information in their credit report. Consumers should review their credit report for accuracy; if a mistake is spotted, they should request that the credit bureau remove the negative item. A revision of the credit report can contribute to credit history repair.
13. Obtaining a Credit Union loan
Borrowers should consider applying for a prepaid credit card or a loan from a credit union and making payments on the latter from a savings account. With each payment that the debtor makes, he or she will improve credit and build a positive credit history.
14. Professional credit repair help
Credit card debtors may wish to opt for professional assistance by contacting a credit counseling service. Credit counselors will create a debt management plan (DMP) that enable borrowers to repay their credit card debt. They will also negotiate extended payment plans and lower rates of interest with lenders. Debtors could then apply the reduced interest rate savings to payment of the debt, which will in turn help to repair their credit.
15. Creating a budget
Financial discipline pays dividends. By devising a budget to spend only within their means, reduce their expenditures and direct savings to repayment of their credit card debt, consumers will be able to repair their credit history.