A Step-by-Step Guide to Reestablish Credit
Reestablishing Credit : A Step-by-Step Guide to Establish Credit or Reestablish Credit after Negative Payment History including Bankruptcy.
The key to reestablishing credit is opening the right credit accounts and paying them on time and in full every month. The key to rebuilding your credit and credit score is positive payment history, increasing your line of available credit, maintaining low debt, while paying on time and in full every month.
Step 1 to Reestablishing Your Credit– Knowing your Current Credit Score and Credit History
To begin reestablishing your credit, you will need to know your credit score and obtain a copy of your credit report. Once you have copy of your credit report, you will need to review existing debts and look for inaccurate reporting information.
Step 2 – Repaying Existing Credit Accounts and Credit Disputes
Existing debts reported on your credit report will need to be satisfied before you are able to rebuild your credit and improve your credit score. Prioritize your debts by paying debts with the highest interest rates first. If you need help determining which debt to satisfy, many credit counseling agencies offer debt consultations and budgeting workshops for free or for a minimal fee.
When rebuilding your credit, you should review each item on your credit report for accuracy. Accurate negative payment information cannot be erased or removed from your credit report. Should you have disagreements about items on your credit report, you will need to contact the creditor in writing and dispute those items.
Step 3 – Evaluate Co-Signing and Free Piggybacking
Before opening new credit accounts and applying for small personal loans, evaluate both co-signing and piggybacking from a relative or close friend. Piggybacking is where you are added to someone else’s credit account, typically a spouse or a relative, as an authorized user. Positive and negative credit information on the shared account is reported on both the account holder’s name and the authorized user. Piggybacking lets you bypass a step to reestablish your credit – having to apply for a new revolving credit account.
Co-signing requires someone else to be responsible for a loan should you pay late or default. Always use caution with cosigning as friends and family may feel obligated to provide help and may not fully understand the risk involved. The cosigner takes risk as if you default or fail to make payments on time the cosigner will be responsible for the debt. Additionally, negative payment and credit information can be reported on the cosigners credit report. With all credit accounts, make sure positive repayment information is reported to credit reporting agencies for both you and the cosigner.
Using a cosigner or piggybacking requires a considerable amount of trust from someone close, typically family or friends. Combining financial affairs with friends and family can be straining and cause difficulties for even the strongest of relationships. There are many ways to to reestablishing your credit including small personal bank loans, unsecured and secured credit cards and fuel and department store credit cards.
Step 4 – Open a Savings Account and a Checking Account
Having a checking and savings account will help reestablishing your credit although will not improve your credit score. Having a checking and savings account helps positively influence lenders when applying for credit.
Step 5 – Research New Credit Accounts
Before applying for new credit accounts, you will need to research what type of credit accounts you will need. Rebuilding your credit requires both revolving credit accounts and installment loans. An example of a revolving account is a credit card with a fixed credit limit and you can access the credit as often as wanted. An installment loan (car loan, student loan, mortgage) requires borrowing a set amount of money and making installment payments over a set amount of time. Make sure to spend enough time to review available credit offers and fully understand the terms of the offer, monthly fees, interest rates and penalties to find the most attractive credit terms.
Caution: Apply for too much credit at once will hurt your credit score! The number of credit applications and recent credit inquiries will lower your credit score. Each credit inquiry is sent to the major credit reporting agencies. Many credit applications are automatically denied if you apply for too much credit at once.
Step 6 – Applying for New Credit Accounts
You will need positive payment history reported to credit reporting agencies to reestablish credit. You may need to open new credit accounts to begin the process. Remember your credit is influenced by the amount of credit inquiries and the number of accounts, so only open a few good credit accounts with appealing terms.
Bank Loans & Credit Union Loans – Reestablishing Installment Loans
A small personal loan repaid in-full and on-time from a bank or credit union is a solid step to reestablish your credit. Installment loan payment history reported to credit reporting agencies has a considerable influence on your credit report. Installment loans from a bank or credit union typically require collateral to secure the loan as well.
When applying for a bank a loan, make sure the lender reports account payment information to the credit reporting agencies. Most importantly, pay off the loan and make all your payments on time and in full.
Depending on the lender and your credit history, you may have to apply for a secured loan that requires keeping a minimum amount in a savings account or purchasing a CD to guarantee repayment. This is common with secured credit cards and may be a necessary step to reestablish your credit.
Visa or MasterCard – Reestablishing Revolving Credit
In addition to positive payment history reported about an installment loan, credit score models evaluate your ability to repay revolving credit. Revolving credit accounts are credit cards with a fixed credit amount and the ability to use the credit when desired. Positive payment history on one or two bank issued credit cards is a solid step to reestablishing your credit. Again, do not apply for more than one or two bank issued credit cards.
When applying for a Visa or MasterCard, you will need to evaluate if you are able to apply for an unsecured credit card or a secured credit card. If your credit history is particularly damaged, you will need to apply for a secured credit card. Secured credit cards are secured by collateral typically in the form of a CD (certificate of deposit) or a savings account that requires a minimum balance. Learn about secured credit cards.
Department Store Credit Cards and Gasoline Credit Cards to help reestablish your credit. Expect higher interest rates and fees on Fuel and Department Store Credit Cards. Simply pay your account balance on time and in full every month and avoid paying interest charges on balances. Department store credit cards and gasoline credit cards generally have less weight in credit scoring models than bank issued Visa and MasterCard credit cards. Learn about Fuel and Department Store Credit Cards.
Step 7 – Building Positive Payment History
Begin rebuilding your credit by making small purchases and paying the balance in full early or on time each month. At your pace, increase the amount you place on your credit cards and continue to pay the balance in full on time every month. A positive payment history while increasing responsible credit usage will reestablish your credit and improve your credit score and available credit.
Remember – Credit scoring models evaluate your ability to repay revolving credit and installment loans. When reestablishing your credit make sure to build positive payment history on both credit cards and bank loans.
Step 8 – Improving Your Credit Score and Increasing Available Credit
When reestablishing and rebuilding your credit, the focus is obtaining and maintaining a high credit score and a low debt to available credit ratio. Increasing your available credit limits while maintaining low debt will improve your credit score. A low credit limit will hurt your credit sore and effect your debt to available credit ratio. Likewise, closing old or unused credit accounts will lower your available credit and lower your credit score.
Step 9 – Maintaining Your Credit Report and Credit Score
Maintaining your credit report and a great credit score requires knowing what information is on your credit report. In addition to creditors and credit reporting agencies errors, identity theft is on the rise. Responding to identity theft and disputing errors reported on your credit report promptly will help limit the damage to your credit score and credit history. You are entitled a free copy of your credit report annually by each of the major credit reporting agencies.