By Jill Terry
At some point in our lives, most of us run into some kind of credit trouble. Whether it’s the result of a difficult divorce, unexpected illness, or simple mismanagement of money, we can find ourselves in a position where we must repair our credit.
Where do you begin? The process is straightforward yet filled with bureaucratic red tape. Stand tall, straighten your shoulders, and be prepared to face some obstacles, but rest assured, it can be done.
- Find Out What’s On Your Credit Report
Don’t guess or assume. Check all three credit bureaus. Credit bureaus are notorious for making errors, so what’s actually on your report could be different from what you expect to see.
Determine the level of necessary repair based on your credit report. Are there a few collection accounts or late payments, or are most accounts in bad shape? Is it your past spending that’s gotten you into trouble or is it how over-extended you are now? Take a cold hard look and determine what needs to happen to make you look good on paper.
- Damage Control
Start by paying off what you can. Take that $60 medical bill, for instance. Or the $100 collection account for the health club membership you discontinued (but they didn’t). If these can be paid, pay them. If you haven’t paid them because you dispute their validity, we’ll get to that in the next section.
If there is even one currently past due account on your credit report, you need to stop using credit immediately. Pull in the reins and use cash for everything. If you like the finality of cutting up your cards (and never intend to use them again), go ahead. Otherwise, lock them away or have a trusted friend keep them safe for you while you impose a moratorium on credit. Meanwhile, bring those accounts current.
- Correct Your Credit Report
If there’s anything on the report that is inaccurate, dispute it with the credit bureau. They must then contact the creditor, who has 30 days to correct the information or it will be removed. Sometimes creditors fail to meet this deadline, but usually they don’t.
If the credit bureau doesn’t correct this information, or if you object to the validity of the debt in the first place, you need to add a brief statement to your credit bureau report. This can take a while, mostly because credit bureaus say you can do this yet they do little to facilitate the process. Keep your statement(s) brief and steer clear of pleas for sympathy or tales of victimization. State what happened and why the negative entry is on your report. If you don’t know why it’s on your report, state that you don’t know. Statements can be made on individual entries or as an explanation for the entire report.
- Establish a Budget
This is the most difficult step. You’re probably looking at debt that outweighs income. No matter. Work toward taking little bites out of your debt burger over time. Construct a budget where there is no allowance made for new credit card payments (because you’re not using credit anymore, remember?). Until you contact your creditors, you won’t know exactly what money is going where, but you can determine now how much you have available each month to put toward your debt. Knowing this will make your discussion with creditors much easier (see step 5).
- Negotiate With Your Creditors
A word to the wise: avoid debt counselors and credit clinics. These places are a bit like diet centers–you pay them to do what you could do yourself, if you had the knowledge and commitment. Debt counselors and credit clinics will “clean up” your credit report (sometimes with illegal methods), work out payment plans with creditors, and help you devise a budget so you can take control of your spending. You don’t need them or the expense they will add to your already inflated debt.
Negotiating with creditors takes time but it doesn’t require sophisticated strategies. Call them and tell them you want to pay off the debt but you can’t do it all at once. Offer to work with them to devise a payment schedule they’ll accept and you can meet.
- Starting Over
Creditor psychology is complicated. While creditors want to see low debt and good payment history, they’re suspicious of people who don’t use credit. In other words, if you’ve been dutifully paying off your debts to the point where they’re paid off, you may encounter new creditors who are leery of you because you carry no current debt! Once you get 75% or so of your debt paid and place all the appropriate explanations on your credit report, you can gradually assume new debt in keeping with your budget. You may opt to take advantage of any of the credit card offers that arrive in your mail (many of which have payment terms designed especially for “risky” people such as you–which means high interest rates, exorbitant fees but often an enticingly high credit line). Your best bet, however, would be any of the following:
- A credit card secured by a savings account (you can’t get into trouble and the interest rate will be reasonable).
- Any loan from a credit union (credit unions resemble what banks used to be–lending emporiums where actual human beings review applicants’ credit worthiness and make decisions based on more than what’s reflected on a piece of paper).
- Any loan with a co-signer.
Tread carefully with your new debt, as this will be the beginning of your new credit life. These steps will take some time and patience, but freedom from a bad credit rating will ultimately simplify your life.