There are all kinds of upsides to getting yourself out from under credit card debt: less anxiety, reduced stress, creative ways you can better spend your money. However, there’s no getting around the fact that during the debt relief process your credit score will temporarily take a dive. This is the case for most every customer, and it’s important to know this upfront. In real-world terms, your rating will be affected for up to seven years. A reduced credit score can compromise your ability to qualify for a loan or obtain a loan at an attractive rate.
Now that the bad news is out of the way, let’s focus on fixing things. The first thing to know is that low credit is not forever. Unlike that D you got back in algebra, you can actually reverse a low credit score. There’s no way to fast-track the process, but you can do much more than wait for it to recover over time. These are active steps you can take right now:
Pay bills on time
This is the most important and easiest to-do item on this list. The last thing you want to do is send your rating south over the gas bill you left on the counter. Credit agencies like to see a history of paying bills on-time and without interruption. Most of us forget to pay a bill now and then, however on-time payments are especially crucial when you’re trying to raise your rating. You can’t afford any more dings to your credit as it is. Even worse, any other progress you do make restoring your score could be wiped out. So, if you’re repeatedly late paying bills, consider letting your bank remember for you. Use the bank’s website or smartphone app to set up automated payments for ongoing bills. It’s super handy for those bills you always remember to pay…two days after they’re due.
Keep credit card balances low, but keep the card
If you have credit cards, keeping the balance low tells the credit reporting agencies you know how to use credit responsibly. Maintaining a high balance says you’re living on the edge of your credit and pose a risk. As a general rule, aim to stay under 30 percent of your credit limit when trying to improve your rating. This is your “credit utilization score” and it’s another statistic credit reporting agencies factor into your rating. When it comes to credit cards you don’t use, you might be inclined to cancel them. Just don’t cancel them in the belief it will improve your score. The fact you have credit, even if you don’t use it, works in your favor.
Use a secured credit card
This is an option for those struggling to qualify for a card as their credit rebuilds. Secured credit cards are unique since they require a deposit prior to use, typically a couple hundred dollars. Once your standing improves, the deposit is returned. These cards don’t offer much in the way of perks, and you shouldn’t expect a competitive interest rate. Also, secured cards may come with specific requirements, such as requiring a proof of a bank account. Whichever card you go with, make sure the card company sends reports to all three credit reporting agencies. Not all do, and you definitely want one that does report in order to raise your rating.
Consider a Credit Builder Loan
This option is less well known, and typically offered by credit unions and community banks. A credit builder loan, like the name implies, lets you build credit by demonstrating to credit reporting agencies that you pay your bills on time. It’s basically a loan that only exists so you can pay it back- you don’t get access to any funds. After you’re approved for a loan amount, the bank holds on to the funds while you make payments. When the loan is paid off, the funds are released back to you.
Find someone to co-sign
The most consequential option on this list- if things go bad. For this, you need a friend or relative with solid credit that trusts you and is willing to do you a major favor. That’s because they are going to take out a loan, or credit card, and include you as a co-signer. At this point, either of you is responsible. You’re taking advantage of their good credit to help you rebuild yours, which means their credit rating is potentially in your hands. If you miss payments or fail to pay back the loan, you’ll be leaving them on the hook for any balance and wreck their credit.
Become an authorized user
For this option, you need a friend or relative with a credit card who’s willing to help you out, and who pays their bills on time. Ask them to add you as an authorized user to their credit card. As the card is used responsibly, your credit score will benefit. This won’t impact your score as much as other items on this list. After all, you’re not the one legally responsible for the card. However, this can benefit those unable to qualify for a credit card on their own. Just know there is a flipside. If the card owner misses payments and sinks their credit score? Then your score will also take a dive.
Avoid applying for new credit
The three major credit reporting agencies know when you apply for credit. Even if you don’t accept any offers, you can still hurt your score just by applying. And the impact is worse if your credit score is already low. So, it’s best to be choosy which credit applications you fill out. And definitely think twice on that credit offer at the checkout register.
We’re here to help you every step of the way in your progress to becoming debt-free. If you have questions about any part of the debt relief process don’t hesitate to call Vantage Acceptance. You can reach one of our Debt Specialists at (800) 725-0214.