by Brandon Cornett
2008 has been quite a year for the real estate industry and housing market. Unfortunately, most of the news was bad. We saw record numbers of home foreclosures, financial institutions failing, and credit drying up to the point that only the "chosen few" can qualify for a home loan.
So in 2009, many Americans will focus on rebuilding. And what better to start with than your credit score?
Make no mistake about it. In 2009, and into the foreseeable future, consumers will need higher credit scores to do just anything that requires a loan. Lenders are nervous these days (the ones who are still around, anyway). They will scrutinize your financial background, your credit, your debt-to-income ratio and other factors to see what level of risk you bring. If you fail to measure up, you can kiss that mortgage or car loan goodbye. Like it or not, this is the reality we will face for the coming months and years.
So if you are one of the thousands of Americans who will need to rebuild your credit in 2009, here are five steps to success:
1. Identify the Source of the Problem
Credit problems are a symptom of a financial "disease." So to get rid of the symptoms, you must first determine what is causing them. You may not have to look very hard to find the source of your financial woes. Perhaps you've gotten behind on paying your bills, or maybe you have a bankruptcy in your past. These are scenarios where the core problem is fairly obvious. And in that case, you can move on to the next step in the path to better credit.
2. Review Your Credit Report for Errors
In a perfect world, the three companies who maintain credit reports in this country (Experian, Equifax and TransUnion) would never make mistakes. But this is not the case. While I wouldn't say that mistakes are common, they do happen quite a lot. So the next step in the process is to order copies of your credit reports from each of the companies mentioned above. You can do this for free by visiting AnnualCreditReport.com, a website that is jointly owned by Equifax, TransUnion and Experian.
It's important to do this as soon as possible, because it can take a long time to get corrections made to your reports. If you find errors, you can submit a request to have it corrected through the website of the company that produced the report. Visit their website and look for a link that says "disputes." There are laws that require these companies to process disputes in a timely fashion. But unfortunately, these laws are toothless and rarely enforced. So you will have to be persistent and stay on top of the company until your report is fixed. The last thing you want is for erroneous information to drag your credit score down lower than it should be.
3. Pay Down Your Credit Card Balances
Financial "experts" love to disagree on things. I guess it makes them feel smart to dispute what their colleagues say. But this is a topic that many of them agree on. Paying down your credit card balances is one of the best things you can do to boost your credit score -- and your financial health in general. When you combine this with item #4 below, you will be on the road to recovery in no time.
There are good kinds of debt and bad kinds. A mortgage loan with a reasonable interest is a good kind of debt. It actually helps you build strong credit to make mortgage payments over time. But those high-interest credit card balances don't do you any good. So work out a budget that allows you to start paying them down. You'll have to pay more than the minimum amount due each month, and you may have to scale back on certain luxuries ... but nobody ever said this process would be easy.
4. Pay All Bills on Time
This is one of the most common reasons for bad credit situations -- falling behind on the bills and missing payments. Think about it from a lender's perspective. Why would they want to loan money to somebody with a clear history of not paying things back? When you look at it from this angle, it's easy to see why this can hurt you so much when applying for a loan.
If you are missing payments because you can't afford to pay them, then you have a budgeting and debt problem. In this case, you should try to reduce your spending as much as possible, or perhaps consolidate your debt into a lower rate.
If, like a lot of people, you simply forget to pay your bills, then you need to create a system that makes it easier for you. Instead of putting bills aside when you get them from the mail, handle them right away. Better yet, get set up with auto-pay so you don't even have to think about making the payments on time.
5. Get Your Spending Under Control
When you spend more than you earn, you acquire debt. It also makes the other steps listed above much harder to manage. You can't get caught up with your finances until you get your spending under control. And in this context, "control" means having a clear picture of your monthly spending, your monthly income (after taxes), and how the two of them relate. Develop a budget so you can see where your money is going each month. Then look for items that can be eliminated.
Improving a credit score is all about discipline and awareness. You must have the discipline to make payments on time, reduce unnecessary spending, and pay down your credit card debt as much as possible. It's hard work. I'll admit that. But it can seriously improve your financial picture ... and your life in general.
Brandon Cornett publishes the Credit Help Blog that offers free advice through an online question-and-answer format. If you have questions about this topic and would like a straight answer, visit the author's blog at http://www.homebuyinginstitute.com/help to learn more.