Strategies to Re-establish Credit

Credit reputation is very important.  Restoring that reputation should be a priority.  There is no rule for how long it will take following difficulties to be considered by lenders.  It is dependent on the seriousness of the problem as well as the type of credit problem and time period involved.

Consider the following suggestions while keeping in mind that rebuilding credit takes time and patience.

Banking

• Open and maintain checking and savings accounts - build a good relationship with a financial institution (bank, credit union, etc.) by showing a pattern of financial responsibility.

• Balance your checkbook monthly, don't bounce checks, and regularly make deposits in your savings account.  Bounced checks may pose a problem; make sure they are paid before attempting to open new accounts.

• Take out a small loan from your financial institution using your savings or Certificate of Deposit (CD) as collateral, save the money (don't spend it) and make on-time payments to build your credit history.  Make sure the lender will report the loan to the credit bureaus.

Pay any outstanding debts - if you owe it, pay it.  If you cannot pay the bill in full, contact the creditor to set up a payment plan.

Devise a budget to ensure new credit purchases are affordable, and live with it.  If you cannot afford a new debt now, wait and save. For ways to create a realistic spending plan, Refer to our separate section on budgeting.

Credit Reports

• Check your credit reports from the three major credit bureaus once per year to insure accuracy and promptly dispute any errors.
  Refer to section on How to Obtain Your Credit Report.

• Start a file called your non-traditional credit history with all of your positive credit/payment information that is not found in your credit report.  Reporting to the credit bureaus is only voluntary and there may be good payment references not reflected in your report such as rent, certain utilities, auto insurance, medical bills, etc.  Save receipts and statements for your file, and ask your landlord for a letter of credit reference.  Show this to the loan officer or bank manager when you are pursuing a loan.

Credit Use - when you are ready, begin to apply for credit after careful thought and research, and use it appropriately.  Start small and build slowly by:

• Applying for a department store card or gasoline card.

• Financing a purchase through a local dealer or store.

• Applying for a secured credit card through your bank or credit union.  A secured credit card can be a good start.  It requires you to make a deposit that is used as collateral to secure a line of credit.
  Refer to our section on Secured Credit Cards.

• Assuring the lender that you can handle the debt and are less of a risk.  You may need to provide collateral, make a larger down payment, have a co-signer or offer a payroll-deducted loan or automatic bank draft for payment.  If you have a co-signer, make sure the loan is being reported to the credit bureaus in your name and not just the cosigner's name.

• Not applying for too many credit cards at once.  Applications for credit are called inquiries and are listed on your credit report for up to two years.  Too many inquiries can be a red flag to creditors.