Not paying a bill is the financial equivalent of breaking a mirror. But instead of seven years of bad luck, you get seven years with a ding on your credit record, making it potentially more expensive for you to borrow money when you need it. That doesn’t mean you should sit by for seven years and wait for your credit score to improve. Rather, it will take hard work and discipline – and not just luck -- to improve your credit score after a serious delinquency. Here are 7 steps to rebuilding a bad credit record:
1. Do some self-reflection
Figure out why you got into this situation in the first place. Did an unexpected event – such as a job loss -- throw you into financial crisis? Were you sloppy with your bookkeeping? Or did you just overspend? Have a plan for how you’ll avoid delinquencies in the future.
2. Check your credit record
Get a copy of your credit report at www.annualcreditreport.com, and dispute any errors you find. You can also submit a 100-word statement, to be included on your report, explaining any negative information that remains.
3. Contact your creditors
Write to any lenders who reported the negative information to the credit bureaus and ask them to remove it. Be polite, explain your mistake and promise to never, ever do it again.
4. Get a loan
It may seem counterintuitive to be taking on more debt when your credit score is low, but the idea is to increase the amount of positive information on your report to show creditors that you are once again creditworthy. Borrow a small amount you know you can manage, perhaps to buy a car or make home improvements. Make sure you can refinance the loan without penalty, so when your credit score improves you can shop for a lower interest rate.
5. Get a credit card
If you get turned down for an unsecured credit card, try a secured one, which will require you to make a cash deposit to serve as collateral. If you pay your bill on time for several months, ask the credit card issuer to convert it to an unsecured card. Make sure the card issuer reports to the three major credit bureaus, and always shop around for the card with the lowest fees and interest rate.
6. Pay your bills on time
Along with credit card and loan payment delinquencies, late-paid rent and utility bills can also mar your record.
7. Avoid scams
Not that we’re superstitious, but that black cat crossing your path may just be an unscrupulous credit repair company. It makes sense to get help from financial experts, just make sure they are legitimate. The justice department keeps a list of government-approved credit counseling agencies for your reference.