Rebuilding Credit

If some change in your circumstances such as serious illness, loss of your job, divorce, etc. sends your financial life into a tailspin your credit score is likely to suffer. How much it suffers of course depends on how bad your circumstances get before you get on track. Some things are easier to recover from than others. I’ve seen financial nose dives so deep and lengthy that emergency funds and other savings were wiped out long before things started turning around. I’ve been through a couple of them myself.

Once you do get things turned around how do you go about rebuilding credit? It’s actually more difficult in these times of tight credit than it was a few years ago. I’d recommend starting with a secured Visa or MasterCard credit card. The credit card is secured by a Certificate of Deposit at the bank. Usually if you maintain the credit card properly (no late payments, etc.) the bank releases the lien on the CD after a year or two and the card becomes an unsecured credit card. With some secured credit card issuers releasing the lien is automatic, with others you have to request it.

How long does it take to have good credit again? That depends. Liz Weston includes a table in her article “Bounce back from bad credit” on MSN that gives different lengths of time for different negative events. I’m not sure if Ms Weston is deliberately being conservative or what, but my experience is that the time frames are a year or two less than her estimates for recovering from things like foreclosures and bankruptcies, if you put some work into it.

Ultimately none of us who are outside the inner circles of Fair Isaac Co and the credit reporting agencies can know for sure what will raise credit scores the fastest but I can offer up what I’ve found to be a pretty good formula.

1. Make sure there are no errors on your report. This is particularly important with bankruptcies. Sometimes debts that were discharged in bankruptcy are incorrectly reported as collection accounts that are still owed on credit reports. Errors can cost you quite a bit in terms of your credit scores.

2. If you have credit accounts in good standing, keep them that way and keep them open.

3. Gradually build up to 3 or 4 credit card accounts. Use them sparingly. You shouldn’t carry balances on them, but you must use them and show activity on them. Spread your applications for credit out by about four months when you are establishing these accounts.

I have seen these actions raise credit scores to acceptable levels within two to three years after a bankruptcy. I do not recommend taking out an installment loan just for the purpose of rebuilding credit. It can be costly and it’s unnecessary. If you need a new car, a car loan will help your credit score and that’s fine. Just don’t spend the money on loan fees and interest for a personal installment loan just to add the line item to your credit report.

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