How to Repair Bad Credit
In past years, before the modern-day sophistication in credit reporting methods – including credit scores, indicators and debt management models – the very basic and simple thing that had to be understood and acknowledged about any bad credit profile is how it originated. We knew then that the act of borrowing created a requirement to repay; and established terms pursuant to which the borrowed item or sum was to be repaid. That remains true today, except that in some cases, a lender is understood to mean creditor and borrower to mean debtor.
Similarly it was understood that failure to repay the borrowed items or sums in full or in accordance with established repayment terms – to which the borrower had to agree as a condition of obtaining the loan – created a possible adversarial relationship with the lender which had not existed prior to when the borrowing transaction took place. It was an accepted premise that the majority of borrowers entered transactions with lenders in good faith and with full and sincere intentions to repay all items or sums borrowed; so the question(s) raised when a borrower failed to repay what s/he had borrowed was, why did s/he not make the repayment(s)?
The answer to this question was known only to the borrower...that is, until s/he made it known to the lender by communicating the reason(s) for non-payment to that lender, thereby reducing the chances for an adverse relationship to develop. On the other hand, a borrower's failure to communicate often led to suspicion, assumptions, misunderstandings and ulterior collection methods employed by a lender to recover the loaned items or sums; and if a borrower was indebted to more than one lender and failed to repay or communicate the reason(s) for non-payment to those lenders, s/he created circumstances under which the only profile lenders could have created and report about was a negative one.
Today, communication with creditors is still the best method by which an individual can begin to address any concerns or suspicions s/he may have about a personal credit profile. This can be done by taking steps to learn about what the creditors s/he is indebted to are reporting about, how they are reporting it and how that reporting impacts the personal profile s/he created with them. Taking these steps are sometimes easier said than done, but must nevertheless be done.
Tracy Becker of the North Shore Advisory, in her newsletter article 'Why Isn't My FICO Score An 850 When I Have Millions In The Bank And Paid Many Large Loans In Full?' stated, “...Most people are very confused by the way credit scores work and how they represent who we are financially...” and this confusion about how modern-day credit scores and credit reporting work often also create apprehension in many people at the mere thought of requesting information from the credit bureaus, even though they are entitled to a free copy of their own profile every year.
So let's agree that the first and most important action an individual can take in order to start dealing with any adverse credit s/he might have is to communicate with the credit bureaus and request a copy of the personal credit profile s/he has on record; and the second action that must be taken is making contact with the creditors that are providing the information to those credit bureaus. Understanding that credit bureaus cannot report anything that was not provided to them by a creditor, it is of the utmost importance to communicate with the creditor to learn more about the particular account, and what steps must be taken to stop the negative reporting.
In the same article cited above, Tracy Becker makes the most fundamental statement about lenders (creditors) and borrowers (debtors) as it relates to the business of lending:
The only way a lender can really make an educated guess [of whether to lend or not] is by seeing how an individual manages current open and active accounts as well as past credit. By looking at the history plus [the] management skills a consumer is using now can allow [that] lender to get a snapshot view of risk without visiting the borrowers hometown and speaking with all of his/her friends, business associates, and local creditors. This [credit reporting system] is a much more practical alternative than the old methods – before scores were created – of visiting the borrower's hometown and speaking with all the friends, business associates, and local creditors [who have relationships with that borrower].
Understanding therefore, that creditors require information about a debtor's past and present borrowing / repaying (credit) activities, but has limited ways – the individual's credit report – in which to obtain that information, it is in the best interest of each individual who is in the market for a new loan to make sure that what creditors learn about his/her credit history is positive. And if your credit history is less than positive or requires corrections, it is imperative that your prospective lender be made aware of the reason(s) your credit has suffered. Once you open the lines of communication between credit reporting agencies and current creditors, you can begin taking steps to rebuild a positive credit profile.
Here are a few steps to consider, but keep in mind that the credit rebuilding process does take time and will not be completed in a week or two, so it's important to keep your focus on the objective and follow your plan of action until the process is completed:
1) Bring any delinquent accounts current and up to-date. If you are to make payments contact your creditors to arrange a workout payment plan or consult a non-profit credit counseling agency to negotiate on your behalf.
2) Be sure to make all future payments on time – this includes rent, utilities, auto insurance and payments on any other outstanding debt you may have.
3) Apply for a secured credit card – some banks and other credit companies specialize in secured credit cards where you deposit a certain sum of money with the bank of your choice and proceed to use that card within the limits of your deposit. Make This Payment On Time!
4) Once you have paid satisfactorily for a period of time (measured in months) try upgrading to an unsecured credit card while also trying to open accounts at one or two department stores; and, if successful, make those payments in a timely manner also.
5) Make sure to keep your balance on these accounts far below the maximums. Try to use 20 to 25 percent of the maximum card limit.
6) Keep these accounts open in order to establish “seasoning” (length of time an account is active) of your established credit. This is viewed positively by the credit bureaus' scoring models.
7) After reestablishing credit it is important to protect it, so refrain from causing too many inquiries to be reflected on your report. These can have a negative effect.
While there are many other actions an individual can take to rebuild and protect a positive credit rating, it is not possible to list them all here at this time. However, the above steps – when implemented – should be sufficiently adequate to the task. Throughout this entire article the one action emphasized is communication, because nothing gets accomplished until the debtor makes that first phone call or write the first letter to those s/he is indebted to.
Comments(0)