Rebuilding your credit - Part 1

I've come a long, long way from where I used to be. A FICO score of only 480, which is virtually rock bottom, makes getting anything that involves credit nearly impossible. So how do you recover from such a downward spiral?

As much as I would like to say it was easy, I am going on 5 years now of rebuilding myself, my history, and getting to the point where I can now get a high interest loan solo.

So where do you start with rebuilding your credit? The first and foremost thing to do is pull your credit report. I went the optional way via Equifax and later TransUnion for their 3-n-1 credit report. I prefer TransUnion now because while a little more expensive (9.99 vs 12.99 a month), you get your credit scores from all three reporting agencies, along with all of the bonus security features one may need.

Take your time to review all of the data, make sure everything is correct and up to date. DO NOT dispute items over 4 years old because it will actually hurt your score than help it. This is how I went from slightly above 600 to a 480 score. Once you have determined everything you have out or in collections, be proactive and make a budget to begin paying things off.

Do not be aggressive about your timeline and budget. Give yourself enough money to live on, have some play money, transit fare, or things you may need for your car.

Once you have your budget figured out, its time to setup automatic deductions from your account for savings. I started off with $50 a paycheck and now sitting at roughly $150 a paycheck that will go into savings. $300 a month may not sound much but at the end of a 12 month term, you will have $3600 bucks you can use or continue to save. If you use it, it will be a good stepping stone towards a down payment on a used car. Combine that with your tax return, you could be in a very good position for yourself and your recovery. For this example, you may be able to qualify for a house of your own in 4 to 8 years. In 4 years of not touching that $3600, you could have $14,400, excluding whatever has built up from interest on your money.

The above however WILL NOT get you credit. It is a method to maintaining a solid and secure budget that you can trust and rely upon.

To start building credit, we now need to look at credit cards. Unfortunately, you have to have some debt in order to gain credit. Its a terrible catch-22 but if you do it smartly and properly, you will not have any issues in your trek to rebuild your credit history.

For those that have a credit score under 620, getting a normal credit card with a small limit is very, very challenging. If you have been making your payments on-time, not a second late, you should have already noticed a slight bump in your history. To continue on the path of growth, take a look at Secured Credit Cards. I have two cards that have dramatically helped me in my progress to rebuilding my history. One card is from Applied Bank and the other is from Capital One. They both have a limit of $800 dollars, which will allow me to cover anything in an emergency. One stays on me at all times and the other is left at home for internet shopping.

This is where things may get a little difficult to understand. In order for you to gain credit now that you have your cards, you have to use them, upwards of 30 to 60 percent of their limit. The trick is to pay them off each month or get it below the 15% mark of you credit-to-debt ratio. Keeping this up for two to three years should have you near the 650-700 range. ALWAYS keep your cards open!!! If you close the cards, you close that chapter in your credit history, thus lowering and damaging your credit score.

After your 4th year of being responsible with your card, apply for a high end card. American Express or Discover will be your best option. While both aren't usable everywhere, they are a strong way to get you near that 800 FICO score.

There are many other things that affect your credit history. Your job history is a very small but important figure. If you have been on the job for only 3 months, you most likely will not get the loan, even if your job history was seamless. Also lenders won't give loans to those who move around a lot. It shows that you are a "flight risk" even if it is within the same median of where you live at. The longer you remain at your residence, the more likely you will get the loan. This is especially true if you are trying to get a recreational vehicle, like a boat, motorcycle, or ATV.

By alternating these methods and modifying them that best suits your needs will give you a strong correction of your credit history. That car, boat, motorcycle, or house isn't too far out when you set goals for yourself.

Keep your head up and keep fighting and you'll get what you want. You'll have to be patient but it'll eventually come to you. It took me nearly 5 years and I am now able to rent an apartment and get a car loan. There were plenty of blood, sweat and tears but the results show that when you want something bad enough, you'll continue to fight for it.

If you have any questions, feel free to contact me!