Credit Rehab: Improve a Poor Credit Score

Poor credit (loosely defined as a FICO score below 620) makes financing things you need a lot more expensive, which increases your chances of having more credit problems.Once you have a bad credit score, it's easy to get caught in a cycle of high-cost debt and late payments. You need to stop the cycle. You need a plan.

Breaking the Bad Credit Cycle

Your first step is to pull your credit report and check out the "reason codes" that explain what factors are impacting your scores the most -- for example, "too many accounts with balances," or "delinquency on accounts." Consumers can have low credit scores because they have too much debt, because they have a very short or limited credit history, or because they have derogatory credit history.

Too Little Credit

If you haven't established credit, you can't have a high score. You'll need at least two accounts, or "trade lines," for most creditors to find your report useful enough to make a decision (and three is better). Establishing credit may involve opening a secured credit card (make sure the issuer reports to all three major bureaus -- Equifax, TransUnion and Experian) or retail credit card (Wal-Mart is considered one of the easiest to get with poor credit), using it for small purchases and paying it off in full each month.In about six months, your score could improve substantially.

Bad History

You can't overcome a derogatory credit history as long as you persist in missing payments. The first thing you need to do is make every payment on time. If you're flaky about mailing checks, try paying online or setting up automatic deductions from your checking account. Create a budget and make sure there is money available to cover your bills. As your balances come down and a string of on-time payments appears on your credit history, your credit scores will come up. Monitor your progress for free at LendingTree and celebrate as your score rises over the next six-to-twelve months.

Too Much Credit

You might make your payments on time, but you're waving red flags credit bureaus can't ignore. Too many accounts, increasing balances, and loads of inquiries tell anyone who looks at  your spending and repayment habits are unsustainable. As balances creep up, you open more accounts until eventually you run out of sources of new credit and start defaulting. Step one is to stop applying for new credit -- the inquiries are killing you. One lender's statistics indicate that 42 percent of borrowers with nine inquiries in the last six months defaulted on their unsecured loans, compared to 4.7 percent of those with no inquiries.

Step two is to stop charging and start repaying. Create a budget and use a tried-and-true strategy called a "waterfall." Pick an account with a smaller balance and put everything you can toward zeroing out that account, while continuing to make minimum payments on your other balances. Once that account has been paid off, add its payment to that of the next smallest account balance. Do this until all balances are cleared.

Professional Help

If you don't have the income or management skills to pay your obligations on time, get professional help. Find a reputable credit counseling service (the US Department of Justice has a list) and let them set up a debt management plan (DMP) for you. You make a single monthly payment, and the service divides it between your accounts and makes sure they get paid on time. Your counselor may also be able to negotiate lower interest rates and payments with your creditors. Stay on track by checking your credit score periodically and celebrating your achievements. You can track your progress for free each month at LendingTree.com.

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