Household debt is up… again. In fact, it’s been on a steady rise in fiscal quarter after fiscal quarter since 2013. The total American household debt, as of March 2018, was 13.21 trillion. That’s right, trillions. No wonder so many U.S. consumers struggle with the slippery slope of bad credit. With the mountain of debt we seem to pile on ourselves, plummeting credit scores seem to be a foregone conclusion.
If you are one of the many badly indebted Americans, you’re not alone. A whole variety of feasible situations may have put you in the position you’re in now.
The first, and possibly most prominent reason for your low credit rating could be due to becoming one of the two million homeowners watching their homes foreclosed upon in 2009 or every year since.
Or, perhaps you were one of the 1.41 million people who claimed bankruptcy in 2009 or one of the hundreds of thousands since. What once was a shame-filled position to find oneself in, has become quite commonplace for millions of us, since the mortgage crisis and the Great Recession of 2007-09.
Even if you managed to make it through the recession without having to declare bankruptcy or give up your home, you may have had to make plenty of financial sacrifices that affected your ability to pay bills on time, thus negatively impacting your credit profile, causing your score to plummet.
Many of us took on new debt in an effort just to stay afloat through the use of additional credit cards or second mortgages. And now, all of these financial life rafts are losing air, causing you to sink in a sea of debt and bad credit.
The good news is, as a country, we have started the road to recovery with the recession finally firmly behind us. Many of us have the opportunity to catch our breath and begin to rebuild our credit.
How To Rebuild Your Credit
The very first thing you need to do is find out what your credit profile looks like. Get a free copy of your credit report, and then monitor your score. Look for inaccuracies in your report and resolve them with each of the three credit monitoring bureaus: Equifax, TransUnion, and Experian. Once you feel comfortable that everything listed in your report is accurate, get a hold of your score and monitor it regularly for changes.
Make Timely Payments
35% of your credit score is determined by your ability to pay your credit accounts on time. Even if you’ve been incredibly late in the past, every future move you make will impact your credit score. You may not be able to change the past, but you may be able to control the future. Every payment made on time translates to small increases in your credit score. Every time it’s late, your credit score may move in the opposite direction.
Get Current On Delinquencies
The next thing you can do is get yourself current on delinquent accounts. 30% of your credit score is dependent on credit utilization — in other words, your debt to credit ratio. Even if you have an account that’s been closed due to delinquency, paying off that debt could make a positive impact in your credit rating.
Pay Down Debt
Try to pay more than the minimum payment on active accounts also, in an attempt to increase that debt to credit ratio. The less amount of debt you have in comparison to available credit, the higher your credit score will be. Even if it’s a little more than the minimum payment you make each month, every little bit is a step in the right direction.
Don’t Close Accounts
Avoid closing revolving accounts. When you close revolving accounts you damage your credit in at least one of two possible ways. First, 15% of your credit score is determined by how old your credit is. The longer your credit history is, the better your score may be. If you close a credit card you’ve had for ten years, you’ve just wiped out ten years of credit establishing history. The more seasoned the trade line the better effect if has on your score.
Second, by closing revolving accounts, you’re closing the available credit portion of that all so important debt to credit ratio. Your ratio just got smaller, meaning movement of your credit score in the opposite direction from what you may have intended by closing the account in the first place.
Make sure that the accounts you do have that carry very minimal balances are still getting used. If you pay off a card and let it sit too long without activity, your credit card company or bank may just close the account before you’ve realized what happened.
Diversify Your Credit
Keep a healthy mix of credit lines going in your profile. Too much of a good thing is just too much, especially when we’re talking credit cards. If your profile is too heavily weighted by revolving credit accounts, and not much of anything else like a mortgage, auto loan, or student loan, you may actually be hurting yourself. In this case, homeownership is a very good thing, even though the mortgage itself is a big undertaking.
Exercise Caution With New Debt
Don’t take on too much new debt too quickly. A spattering of hard inquiries or acquisition of new credit lines in a short period of time will hurt your credit score. Although you may be willing to take the temporary hit to your credit, especially if the credit is very well justified, the sudden opening of three credit cards in a three month period, for instance, may be very damaging.
Knowing what your credit report says about you, and monitoring your credit score are the best ways to get started rebuilding your credit. Constant awareness of your goal and what you need to do to get there will help you focus on the necessary steps to get back on the road to good credit.
It may not happen overnight, but by paying down debt, paying on time, not accruing new debt, keeping accounts open, and monitoring your score, you may actually be surprised by how quickly your credit starts to show signs of recovery from its own personal recession.