Bad Credit? Hope Is Not Lost

Illustration for article titled Bad Credit? Hope Is Not Lost
Illustration for article titled Bad Credit? Hope Is Not Lost

While the foreclosure crisis continues to fade from the headlines, many families are still dealing with the lingering effects.  The foreclosure crisis set off a tidal wave, contributing to the recession of 2008. This caused the unemployment rate to skyrocket and left families struggling to make ends meet.

Because of the financial hardships stemming from the economic crisis, millions were unable to pay their mortgages, car loans and credit card bills, which in turn, resulted in bad credit. The spiral effects of bad credit include difficulty landing a job, getting new lines of credit and qualifying for lower interest rates on loans.

If you find yourself in this situation, here is what you can do to improve your credit score:

First, understand your credit score

The following factors determine your score:

  • Payment history (35 percent). On-time payments mean a higher score. Late payments and delinquent accounts will significantly lower your score.

  • Debt-to-Credit Ratio (30 percent). This is also called “revolving utilization” and is specific to your credit card accounts. If your credit limit is at $1,000, creditors don’t want to see you maxing out the entire credit limit. Try to keep your total revolving utilization ratio as low as possible – 30 percent is good but 25 percent is better and if you really want to maximize your credit score. This goes for your total revolving utilization and for each individual credit card. Maxing out your credit lines can lower your score.

  • Length of credit history (15 percent). This shows how long you have been using credit and how you have managed your finances in the past. The longer your credit history, the better, so avoid closing accounts which have been opened longer, even if you don’t use them.

  • New credit accounts and inquiries (10 percent). This includes accounts you’ve opened recently, and recent inquiries from companies you have applied to for credit. Credit inquiries remain on your credit report for two years but are only factored into your credit score for the first 12 months. The main point to remember is that applying for a lot of credit in a short period of time can lower your score.

  • Diversity of credit (10 percent). Lenders want to see that you can manage various types of credit such as revolving debt (credit cards) and installment loans (mortgages, student loans, and car payments). If you’ve previously had a foreclosure, properly managing student loan or car payments are a good way to boost your installment-loan payment history.

Manage your existing lines of credit properly

You need open lines of credit to increase your credit score. Having a positive payments report is one of the most effective ways to rebuild your credit. So if you have a car payment or other lines of credit, pay them on time.


Use credit rebuilder products

If you don’t have any open accounts and aren’t comfortable taking on new debt or are having trouble getting approved for a traditional credit card consider opening a secured card.  Remember the credit scoring factors above, keep your balances below 30 percent of the card limit. How much debt you allow to accumulate on your card is just as important as your payment habits.


Credit rebuilder loans are also an option. Several credit unions offer them and they allow individuals to rebuild their credit without the risk. This loan is often secured by an initial deposit or savings account.  The loan is then gradually repaid with the deposited funds and these payments are reported to the credit bureaus. As the loan is paid down, the funds held are released back to the owner’s savings account.

Illustration for article titled Bad Credit? Hope Is Not Lost

Seek professional help

If you feel uncomfortable embarking on the credit-repair journey alone there are several community-based organizations that help individuals develop a credit rebuilding strategy. Several cities have services that help people with debt management and budgeting as well. The CFPB also offers several helpful resources.


Beware of instant credit-repair scams

There are several legitimate credit-repair companies, but there are also several fraudulent companies that end up taking money from individuals instead of helping them.


As Neal Frankle said in his Huffington Post article, "In truth, there is nothing that a credit-repair firm can do for you that you can't do for yourself, and do so in less time and at less cost. But there is nothing that will hurt your credit score more than working with a credit-repair firm that is not reputable — and there are plenty of those."

You may have hit a road bump, but the great thing about credit scores is that they can be improved. It’s important to remember, rebuilding credit is a gradual process. You didn’t get in trouble overnight and you won’t get out of it overnight. It can take as little up to six months to a year before you see significant changes in your score. If you prefer to enlist additional support, seek out the assistance of a financial advisor who takes a holistic approach to financial services and is familiar with credit rebuilding strategies. Not only can they help you with repairing your finances, but they can also help you create and execute a solid financial freedom strategy.