4 steps to rebuild your credit

Q: Between my par­ents and ex-husband my credit is com­pletely destroyed, since I have got­ten out of the Army I have looked for ways to get a bet­ter credit score. Some friends told me that I could get a credit card and pay my way out of a low credit score except my score is so low I can’t even do that and I can­not afford to go bank­rupt. Is there any other option I can get to help my situation?

–Katie, Franklin, Kentucky

 A: While it’s fairly easy to quickly and effi­ciently crash your credit score, rebuild­ing it is def­i­nitely not an overnight propo­si­tion. That being said, here are four steps to put you on the right path:

Step 1: See where you stand. Get a free copy of your credit report at www​.annu​al​cred​itre​port​.com and pay a few bucks to get your credit score. This will give you a start­ing point from which to build. It will also give you an oppor­tu­nity to make sure there’s not any erro­neous infor­ma­tion on your report.  

Step 2: Cre­ate a spend­ing plan/budget—spend less than you earn and look for oppor­tu­ni­ties to cut back to increase what is avail­able to pay off any debt that you do have. Your first goal beyond mak­ing pay­ments should be to build a small cash cush­ion to elim­i­nate need to use debt if some­thing bad hap­pens. I nor­mally rec­om­mend the equiv­a­lent of at least 3–6 months of expenses, but when you’re just start­ing to dig out, you can start smaller and then refo­cus on the big­ger emer­gency fund when you have the debt knocked out.

Step 3: Get back in the game. It sounds as if you’ve tried this and been rejected. There are sev­eral options that might allow you to access credit and start record­ing con­sis­tent on time pay­ments. First, look for a secured credit card. This type of card requires you to make a deposit, typ­i­cally in a CD, at the bank that issues the credit card. Nor­mally, your spend­ing limit is set based on the amount in the CD—thus, your credit card is secured. The key in this type of sit­u­a­tion is to make sure that your bank reports your pay­ment his­tory to the credit bureaus. Again, you want that record of on time pay­ments.  You also might look at pick­ing up a depart­ment store card or gas card. These types of cards are typ­i­cally eas­ier to get.  Finally, in many cases if you’re were not hav­ing any luck you might look to your par­ents to co-sign a small limit credit card with you. Based on your ques­tion, this might not be an option.  I typ­i­cally tell folks never to co-sign with some­one with bad credit (like you), because they are respon­si­ble for what­ever hap­pens. But, if you can’t make any of the other ideas work, this may be another option.

Step 4:  Remem­ber the fun­da­men­tals. The folks that invented credit scor­ing, Fair Isaac, have some great edu­ca­tional pieces at their web­site. What you’ll see there is a roadmap for rebuild­ing and main­tain­ing your credit score. Mak­ing on time pay­ments, not owing a lot, build­ing a long his­tory of using dif­fer­ent types of credit, and not apply­ing for a lot of credit are all part of your road ahead. In my mind, respon­si­ble use of credit comes down to using it as a tool to live within your means, not a means to live beyond them! Good luck.

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Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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