BUILDING / RESTORING BAD CREDIT
Since I just uploaded a blog on how I completely turned around my financial situation, I figured it would be fitting to post a How-To here on how to build/fix credit.
1. Go on Transunion / Equifax and sign up and pay for your full report. It’s handy to print it out for your records as your report is only viewable for 30 days.
2. Highlight all of your accounts in collections / debts (if any) and label them in priority. (Usually I pay off smallest amounts first)
3. Find the numbers related to your collection accounts and make arrangements to pay the balance owing – if amount is high, you may be able to negotiate a settlement amount.
4. It’s usually a good idea to request them to also update your credit file ASAP so it shows you paid the balances. Depending on how long you’ve had those delinquent accounts on your file, you may be able to remove them altogether.
5. Make sure you keep your bank accounts in the green. Even if you have access to overdraft, it reports negatively back to the credit bureau if you have your bank accounts consistently sitting below the positives.
6. If you have any credit cards, make sure you keep them below 50% of their max capacity. Definitely under 75% at all times, or at least during the reporting period. You may have to contact your financial institution your card is issued through to find out your reporting date if you’re unsure. (Reporting date is different from billing date.) having over 50% balance on your card report back to the credit bureau shows that you are utilizing funds that “aren’t yours” and negatively impacts your credit score.
7. If you struggle to keep below 75% or 50% of your credit limit, then you may want to opt into increasing the overall credit limit so that you fall below the 50% mark. This is a good idea for those who can’t necessarily keep up with payments enough to keep them under the 50% mark – that being said, just because you have access to more credit, doesn’t mean you should use it.
8. SAVINGS. One thing I learned, is that banks actually look at your savings more than they look at your credit card habits. You could pay your credit card on time every month and never be late and have no money in savings at all and still have banks label you as a risk. It’s always a great idea to open a savings account and throw money in whenever you can – I personally opted for a high interest tax free savings account. The way the banks look at it, if you have a fair amount of money in a savings account that you only contribute to and not withdraw from, it shows you have self control and are responsible. It also helps your case getting any form of loan – plus, who doesn’t want to collect interest?
9. I know this one seems like a no brainer, but don’t be late on monthly payments! A lot of bills don’t report monthly to your credit bureau (for example, insurance and utility bills) but if you have a cellphone, internet/cable/home phone, credit cards and car payments – it is definitely in your best interest to never be late. As soon as you let a payment become “past due”, it shows up as a delinquency on your credit report – which potential lenders could see as a risk.
10. Keep an eye on your utilization – one error a lot of people seem to make (myself included, I also made this error) is having way too many accounts opened. Revolving accounts are often credit cards or student line of credit – the more money you have access to, the more negative equity you assume.
For example: if you have a $5,000 credit card, $20,000 credit card, $3,500 credit card, $50,000 line of credit and a $30,000 auto loan – your total negative equity is $108,500. Even if you haven’t maxed out any of those accounts, you still have access to that money so it still counts as a loan.
This could affect the amount of money you could potentially be approved for when it comes to applying for a mortgage. They will look at how much money you currently have access to, and that could eat into what you could be approved for. If you were aiming for get a mortgage loan of $400,000 – the bank could look and see you are already at high utilization for open loans and instead of offering you $400,000; they either offer you $300,000 or request that you increase your down payment to offset it.
11. Credit cards – if you have bad credit and are unable to obtain a conventional credit card through major banks – it might be in your best interest to check out Capital One cards. They have various options available – many of them have annual fees but hey, it’s worth it in the end. If your credit is below 450, they may request a security deposit to be placed on the card because you’re high risk. I haven’t seen that too often, though. Personally, I got a $300 limit Capital one MasterCard which I used for my monthly insurance charge and for small purchases like gas. As soon as my card was charged, I made the mistake of paying it right away. Good rule of thumb with credit cards is to wait until the billing period and pay your balance around the time it’s due – it reports more accurately to the credit bureau that you made on time payments.
12. When it comes to credit card use, I for one do not use mine unless I know I can pay it off within that month. If I use my card for smaller purchases, I just transfer money from my other accounts onto the card and make sure I keep it below 50% capacity. A credit card is a great tool for building credit and trust again – even a secured credit card is a good step. (Secured credit card is when you essentially pre-pay an amount, and only use the amount you pre pay for the card. Essentially you’re borrowing your own money.)
13. Don’t close out credit card accounts – if you are done with a credit card whether you want to stop using it, no longer using it or need it, don’t close out your credit account. Instead, transfer your credit balance over to another account / card, and keep that revolving account open. Why? Because it saves all of your reporting history. If you close out that account, it all goes away.
For example, say you’ve had the same credit card for 8 years and always pay it on time and have a stellar credit history with it but find you no longer need it anymore so you close the account entirely. Well, you know that 8 years of reporting data you created? All gone now. It’s better to transfer the balances and keep that account open so that it shows the reporting data still, which looks great for lenders.
14. Another one that seems pretty obvious, but live within your means. If you make $2,500 a month – don’t rent an apartment that uses more than 45% of your monthly income, don’t purchase/lease a car that is out of your budget, don’t get the latest iPhone with the premium+ cellphone plan, don’t subscribe to monthly subscription services that will consume a large portion of your income and don’t splurge on take out and skip the dishes. Get a room mate to help offset cause of your apartment/house rental (or even if you own the house) when looking for a car loan, try to keep it 15% or below your monthly income. Same goes to your insurance – shop around for the best interest rate and for the best insurance rate you can. Cellphone plans are always changing, a simple call to your wireless provider will let you know if there are any better plans available (for example, I had a $115.00 3GB plan with Rogers, I called during a promo period and locked in an $85.00 10GB plan. Saving $30 a month and scored 7 extra gigabytes!
15. Saving money tip: download the Flipp app available for Android and iPhone.
You can search through all of the weekly flyers and find what the best sales are. You can search for specific items which can help with price hunting – on top of that, you can create a structured shopping list which can help you stray less when shopping, as well as price match items and clip any coupons that may be available. I’d say the price matching feature is hands down the best part about it! Save some money, keep focussed while shopping = more money in the savings account.
16. Above all – stay consistent. It takes time to build credit back up and fix a not-so-great credit score. Trust me, I know! Pay your bills on time, live within your means, keep credit cards under 75% at all times, don’t let your bank accounts stay in overdraft, use your credit cards and pay the balances off in time and you should see that credit score soar. If you have any questions about your situation and specific credit file, you can always call Transunion / Equifax and they can advise you on what is weighing down your credit / what might help it.
I hope this helps! If anyone has any questions or even something to add, feel free to comment and let me know! Good luck, brats ❤