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You’ve trashed your credit. Maybe it wasn't even your fault. You could have had a medical emergency that cost you thousands of dollars. Maybe you were in an automobile accident and your car was totaled. Or it could be that you lost your job and didn't have enough money to both pay your bills and keep a roof over your head. Of course, it could have been your fault. Did you charge wildly on a two-week dream vacation without considering how you'd repay the credit card company? Did you quit making payments on your cards because you just didn’t have enough money to make even the minimum payments?
The embarrassment of being declined
You know for certain you're in trouble with your credit cards when you're trying to checkout at your favorite store and your credit card is declined. That can be a horrible feeling. Fortunately, there are things you can do to repair your credit, which is not as difficult as you might think.
First, if you find that you're in trouble with debt don't apply for any more credit. Maybe that's a sort of well, duh, but if your credit is already poor the last thing you need to worry about is more credit. It's likely that the application system will auto decline your application anyway. However, the more times you try to get new credit the more this will damage your credit report. This can bring down your score even further (more on this later).
Review your credit reports.
You have three reports because there is three credit reporting bureaus. They are Experian, Equifax and TransUnion and they are obligated by law to give you your credit report free once a year. You can also get your credit reports individually or simultaneously on the website www.annualcreditreport.com. But whichever you choose it's important to get your reports and read them carefully to see what the lenders are seeing that's damaging your credit. This could at least help you do better in the future.
If you would like information on how to read your credit reports watch this short video courtesy of National Debt Relief.
Pay down your accounts
A third way to help resuscitate your credit is to pay down your accounts. One of the biggest factors in your credit score is your debt to credit ratio. In fact, it accounts for 30% of your score. If you have a high debt to credit ratio it’s because you’ve used up a large percentage of the credit available to you. When you pay down one or more of your accounts this will improve your ratio, which ultimately will help your credit score
Dispute errors on your credit reports
Another reason to review your credit reports regularly is that one or more of them could contain errors. Your credit card company or a business could have reported something to the credit bureaus by mistake. If you do find an error it's important that you dispute it. You could do this online but it's much better to write the credit bureau a letter disputing the item you think is an error. Once the bureau receives your letter it will contact the company that provided the information and ask for it to verify it. If it is unable to do so or if it fails to respond within 30 days the credit bureau is supposed to remove the item from your credit report, which might be able to improve your credit score.
Open an account at a credit union
If you have a good job and need to prove yourself in terms of your credit you might want to join a local credit union. This is because credit unions tend to be a bit more liberal with credit. Or it might offer a secured credit card that would help you get started. If you use that secured card wisely, you might be able to eventually convert it into a normal credit card.
Did you know that it's important to have different kinds of credit? Having a credit card or credit cards is only half the battle. If you have an installment loan, a line of credit, a mortgage, an installment loan or some other form of credit this can help your credit score considerably. This shows potential lenders that you are responsible with multiple kinds of credit. Of course, being responsible with all those different kinds of credit means making all of your payments on time every month going forward.
Get a secured card
As mentioned above, if you're trying to rebuild your credit a good way to start is with a secured card. This is where you deposit some amount of and then use the card to charge against that balance. Once your balance reaches zero, you could deposit more money and continue to use the card. You need to be careful which type of secured card you choose, as there are two types. One is a prepaid debit card, the other a secured card. In both cases, you deposit money and then charge against the balance you’ve created. If you were to choose a prepaid debit card, you would load it with money just as with a prepaid cell phone.
However, with a secured card you deposit the money with the card issuer and then draw against it just as if it were a checking account. Of course, you can’t overdraw the account, as you could with a checking account because when your balance reaches zero the card can no longer be used. Prepaid cards are called cash centered transactions because you’re not using the bank’s money. In comparison, with a secured card you've actually deposited money with the card issuer (a bank) and are drawing against it.
What this means is that the biggest difference between these cards is that how your use a secured card will be reported to the credit bureaus but not how you use a prepaid card. This means if you're trying to rebuild your credit it’s important to get a secured card. Naturally, you will want to use it sensibly which means adding money before your balance reaches zero and not trying to use the card when there is no money left in your account.
Understanding your credit score
If you are serious about repairing your credit it's important to understand how your credit score is computed. As mentioned earlier in this article 30% of your credit score is based on your debt to credit ratio. Your credit usage or how you've used credit in the past accounts for 35% of your score. If you have misused your credit there's nothing you can do about it because, well, history is history. Another important factor is length of credit history as it accounts for 15% of your score. This is basically how long you've had credit. The different types of credit you’ve had accounts for 10% of your score as we covered in the section about signing up with a credit union. The final 10% of your score is based on what are called hard credit inquiries or how many times you applied for credit. Your score is actually dinged two points every time you apply for credit. These stay in your credit report for two years though their significance diminishes at six months and then at one year.