For those of you who are coming towards the end of their debt journey, a common question often asked is how do you start rebuilding your credit rating? Well there isn’t an easy answer to this question, but I have decided to write a list of 10 steps towards rebuilding your credit rating, based on my own experience.
1. Get a copy of your Credit Report.
It is so important that you see what bad stuff your lenders have been saying about you. I don’t mean things like them calling you names or talking about you behind your back. What I do mean though is things like defaults, late payment markers and arrears. Your first job should be to find out what your creditors have been saying about you, so you can check it is correct.
You can usually use services such as CheckMyFile or Experian Credit Expert. You can also write to request a copy of your report from the four main credit reference agencies. In all cases there is a charge, unless you can get a free trial.
2. Check the information on your credit report
Now you have got a copy of your credit report, you should check that the information contained within it is in fact correct. So for instance, if you have an account that is marked as defaulted in December 2012 and you have a default notice with October 2012, get it corrected and complain. I did this and got compensated.
Make sure that any accounts on your credit report are actually your own accounts. If not, have them removed. If you have financial associations with someone you are no longer with, get those removed too.
3. Finish paying off your existing Debt
Make sure you pay back all of your existing debt. Again checking your credit report for any accounts you may have forgotten about. Paying it off helps a little but the adverse data will still be there for a little while longer. When most lenders see this data, they will run a mile. It is important to remember though that this won’t be the case forever.
4. Give it time
When it comes to improving and rebuilding your credit rating, time is the best thing. With time the information on your report becomes less important and eventually the bad or adverse information will be gone. Time is what it takes to get to that point.
As an example, a default which is a type of adverse data, will send most lenders running for the hills, is removed six years from the date it was first registered. So if you got a default in December 2012, it would be removed in December 2018. Six years is a long time but it will happen.
5. Be careful with future credit applications
You may consider getting a credit building credit card such as one from Aqua Card or Luma Card. You could try applying for a more mainstream credit card such as one from MBNA, the chances are though that you will be declined. You are most likely stuck with applying for bad credit products for now, but used sensibly, these types of credit should help improve your overall credit score.
6. Learn from the past
I am guilty of making big mistakes when it comes to managing my finances. So take what you have learned and apply it to the future. Make sure you pay off any credit you have on time, and don’t over commit yourself. Above all be smart with your new credit to avoid getting back into debt again, that’s the last thing you will want to do.
7. Don’t go mad with credit
When your credit rating starts to improve, remember not to go too crazy applying for different credit cards and loans. You are just trying to rebuild your credit for a mortgage perhaps. If you feel like you are going off the rails again, stop and assess where you are up to and make a plan to put things right before things get out of control.
8. Avoid using credit to pay for things you can’t afford
If you are sticking things on your credit card that you wouldn’t otherwise be able to afford, stop! See credit in a different way. It is something you can use but only for essential things such as buying your own home. Buying expensive clothes or living a champagne lifestyle on a beer wage is only going to take you back to the debt you have just escaped.
Hayley wrote an excellent post recently about the Buy now Pay Later trap. It’s well worth a read and will help you put things into perspective. There is also a post about how to avoid getting into credit card debt, again feel free to have a read if you have some time to kill.
9. Learn the art of saving
Instead of relying solely on credit, get into the habit of saving and being sensible with money. Use any credit you do have sensibly. For example if you have a credit card, pay the balance off in full at the end of the month to avoid paying any interest. See credit as a last resort instead relying on your own savings to fund those bigger purchases or emergencies.
10. Look after your Credit
Now you are trying to rebuild your credit rating, it is super important to look after any accounts you have. When I say this I mean making sure you make payments on time, don’t max out any credit cards you have and don’t make loads of separate applications for different credit products.
Over time you credit rating should start to improve to the point you will find getting credit easy. However with that said, apart from getting a mortgage, do you really need credit any way?