Bad credit doesn’t necessarily come just from shopping too much with credit cards or even excess spending. Medical bills or falling home values can lead to bankruptcies and foreclosures that can also tank your credit scores.

If you take no action, your credit rating revives after about a decade, but you can jump-start the process by limiting damage as it occurs, then taking affirmative, credit-building actions. Here are tips to get you started.

 

Limit the Damage

If you are sliding toward major financial problems, position yourself carefully to limit the damage. If you can’t avoid defaulting on some of your debts, consider choosing not to pay one credit card — the one with the highest payment due — rather than letting them all slip into default. One default looks better than three or four. Credit card debt is not secured, so defaults do not count as much against your credit score as failure to pay your home mortgage or car loan.

 

Rebuild Credit With Secured Credit Cards

After a bad credit score hit, you probably won’t qualify for a regular credit card for a while. However, after a settling period, approach your bank or financial institution about getting a secured credit card. It works like this: you place the required security deposit in a bank account and leave it there for a year. You’re issued a credit card with a limit equal to the amount of your deposit. 

If you make timely payments, your card can be converted into a regular, unsecured credit card at the end of the year. And, in the meantime, making payments on a secured credit card has the same effect on your credit score as any other card.

 

Rebuild Credit With Deposit Accounts

Checking, savings and money market accounts help boost your credit rating. Creditors consider these deposit accounts an indication of a person’s financial stability regardless of whether or not you make regular deposits. Having deposit accounts shows that you are thinking about saving money and also establishes that you have a way to repay debt. 

If you choose to open a checking account, be sure not to bounce any checks. The company who receives your bad check is likely to report you, and there goes your improved credit rating.

 

Stay on Top of Your Credit Rating

Once you start building up good credit, stay on top of it. This means paying bills on time and paying off credit card balances every month. It also means getting a copy of your credit report and clearing up any errors. 

Each of the three nationwide credit reporting companies — Equifax, Experian and TransUnion — must give you a free copy of your report every year if you ask — so go ahead and do it. If you find errors, write a letter to the credit reporting company telling them what information is inaccurate and provide backup documentation. The companies have a legal obligation to investigate your issue within 30 days and give you the results in writing.
 

Key Concepts

  • Repairing bad credit
  • Improving credit report

Fixing bad credit