Rebuilding After a Blunder: How to Improve Your Credit Score Fast
Do you have collection debt, judgments, a foreclosure, or even bankruptcy on your record? If so, rebuilding your credit might seem like an impossible task. Many consumers just assume they will suffer the consequences of bad credit for the next seven to 10 years until negative items are removed from their credit reports.
Maybe you figure “good credit” is so far out of reach, you can forget about qualifying for a mortgage or any other loan with a decent interest rate any time in this decade at least. What if I told you it is actually possible to rebuild your credit score after a blunder or two (or following multiple past mistakes) within a few years?
"Jenny" Back Then
Jenny (not her real name), came to see me about a year and a half ago and her credit score was in the low 500's. Her home had already foreclosed and she was in the process of a messy divorce that left her with mountains of unsecured debt.
Jenny ended up filing for bankruptcy and I helped her create a balanced budget for a fresh start going forward. We discussed some ways she could start rebuilding her credit score immediately, despite having a foreclosure and a bankruptcy listed on her credit reports.
Bankruptcy eliminated all of Jenny’s credit card debt along with the required monthly payments so she could afford to take her student loan out of deferment and start paying down her college debt.
She also made a point to start establishing a healthy credit history immediately following her bankruptcy, by getting a secured credit card right after her bankruptcy was finalized. She used the credit card to pay her $50 cell phone bill each month and did not carry a balance or take on any new debt.
Her credit limit on the card was $300 so charging $50 per month was well under 30% of her credit limit...and she made sure to pay on time every month.
So, let’s fast forward to where Jenny is now. She recently came in for a follow-up appointment and we pulled her credit report and checked her score.
Believe it or not, Jenny's score was 701 already, despite having filed for bankruptcy and losing her home in foreclosure less than two years earlier.
It really doesn’t matter how much you messed it up in the past, you can still regain control and improve your score much faster than you think.
The actions you take, both good and bad, within the most recent two years of time, have the biggest impact on your credit score. This means that your credit suffers the most immediately after a negative item is reported.
Jenny’s credit score probably dropped down even more immediately after filing for bankruptcy, but as time passed, that negative mark was not as big of a factor when calculating her score. The bigger factor was Jenny’s more recent positive activity where she showed that she could use a credit card responsibly on a consistent basis.
Now what do you think would have happened had Jenny failed to take that simple step to establish a healthy revolving credit history? What if she had put off obtaining and using a secured credit card responsibly or simply failed to obtain or use any credit at all?
Although it’s impossible for me to give you an exact answer here, I can tell you that I’ve counseled clients who are proactive, like Jenny, and others who put their credit repair plan on the back burner.
I can tell you that after six years of experience as a financial counselor, I’ve counseled many people with bad credit, and those that fail to take those few extra steps to establish a healthy credit history should not expect much of an improvement in their credit score. And maybe even no improvement at all, even several years after the negative item was reported.
Establish a Healthy Credit History
I just had a different client in my office recently and she had paid off or settled over $15,000 worth of old collection debt. Her credit report showed that all of her collection debt balances were now $0 and all of her outstanding balances were satisfied, but guess what? Her credit score was still only 592.
She figured her score would be much higher since she took care of her obligations and cleaned up her bad debt, but unfortunately, she didn’t have a single open account - and therefore no credit history. The bottom line is this: You need credit history in order to improve your score. So to improve your score quickly, the most important thing you can do is establish a healthy revolving credit history going forward.
Don't expect time alone to heal past credit wounds. If you've made credit mistakes in the past and you want to improve your credit score, then start using credit responsibly as soon as possible.
For example, if you obtain a secured credit card immediately following a bankruptcy and you use that credit card responsibly, you will re-establish a healthy credit history and your score will continue to improve over time. This is assuming you always pay on time every month and keep revolving debt balances below 30% of the available credit limit.
Remember: Credit Scores are Complex
Simply paying off bad/old debts will not give you good credit.
Recent positive credit history is a MUST in order to improve your score. If you clean up past mistakes without being proactive about the present, your credit score will not reap the benefits of your efforts.
In fact, paying off old collections or satisfying judgments could lower your score initially, but it's still important to satisfy old collection balances, if possible. It isn’t the best idea to ignore old debt in hopes they will eventually fall off your record.
Even with recent positive credit history, what lender is going to give you a loan if you have outstanding collections listed on your report?
Check Your Credit Report and Correct Errors
Consumers have the right to check their credit reports once per year from each of the three major credit bureaus (Experian, Equifax, and Trans Union). You can obtain a FREE copy of each report online at Annual Credit Report.com.
Over 65% of consumers who check their reports find errors that need to be corrected. If you've recently filed for bankruptcy, it's important to check your credit reports 6-12 months post-bankruptcy to make sure all of the debts included in your bankruptcy are listed as discharged. If you've recently paid off a judgment, then it's up to you to check your report and make sure the judgment has been updated as satisfied.
Remember, it doesn't matter how bad you've messed up your credit in the past, you can always bounce back within a few years if you take steps to establish a healthy credit history going forward, clean up the past, and check your reports regularly for errors.
Do you need help reading and understanding your credit reports? Give LSS Financial Counseling a call at 888.577.2227 to schedule a free credit report review session with one of our Certified Financial Counselors. We can help you create an action plan to get your credit back on track.
By Mary McKeague