How Can I Get Credit With Bad Credit?
Money Girl gives you 6 ways to build credit when you’re recovering from a financial hardship.
Laura Adams, MBA
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How Can I Get Credit With Bad Credit?
I received this question from Sam:
“I had excellent credit until 2003, when I was in a car accident. I couldn’t pay some of my medical bills and they went into collections. My credit report shows debt that’s already been settled, paid off, and some that doesn’t even belong to me. In the decade before the accident, I had 4 car loans that I paid off early. I also always kept balances on my credit cards so my credit would grow. But none of this good history seems to help. What’s the best way to get credit when I have bad credit?”
No matter why you may have bad credit, there are fundamental rules you must follow to turn the corner and improve your scores. In this 2-part series, we’ll cover 6 ways to build credit when you’re recovering from a financial hardship or debt charge off.
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Improving your credit is a lot like getting in shape. It doesn’t happen overnight because there simply isn’t a quick fix. Building your physical or financial health takes time, especially if you’re already overweight or are recovering from overdue debt or a bankruptcy.
But the good news is that there are ways you can improve your credit sooner rather than later. Use the following rules to jumpstart your credit recovery and improve your financial health:
Rule #1: Correct Credit Errors
There are many different types of credit scores that creditors and merchants use to evaluate you. In fact, a representative from one of the top 3 credit agencies told me that there are probably over 1,000 different credit scoring models in use today!
Although each type of score is based on a different mathematical algorithm, they’re all calculated using data in your credit report. That’s why you absolutely, positively must treat errors on your credit report like a hot potato—get rid of them as quickly as possible!
Visit annualcreditreport.com to view your report and immediately dispute debts that you already paid, accounts showing the wrong balance, or debt that isn’t yours.
See also: 5 FAQs About Your Credit Score
Rule #2: Watch Your Negative Accounts
Accounts with positive information stay on your credit report for 10 years. For instance, a car loan with no late payments remains on your credit history for 10 years after you pay if off.
But you may be surprised to know that accounts with negative information—like getting turned over to a collections agency—drop off your credit report earlier. They should disappear 7 years after your original delinquency date.
So, make sure you don’t have any negative accounts lingering on your credit report longer than they have to. Otherwise, they’ll drag down your scores unnecessarily.
It’s important to understand that even after a debt falls off your credit report, creditors can still pursue you for payment. They can even sue you, depending on the statute of limitations for debt in the state where you live.
However, filing for bankruptcy is a different story. In general, it prevents creditors from attempting to collect debts. But the details of a bankruptcy can remain on your credit history for up to 10 years, which can be devastating for your credit.
See also: How to Get a Credit Card With Bad Credit
Rule #3: Use Your Credit Strategically
I mentioned that credit accounts with positive information stay on your credit history for 10 years. Therefore, despite having bad credit, if you do have loans in good standing, use them to your advantage.
A quick and dirty tip is to never pay off loans early when you’re trying to build credit. Keeping loans active with positive payment history through the end of the term helps your credit in the long run.
Sam mentioned that he paid off 4 car loans ahead of schedule. While this might seem like a responsible way to handle debt, you never get “extra credit” for paying off a loan early. Having these positive accounts fall off his credit history sooner rather than later may be contributing to Sam’s current credit problem.
Note: But if you already have great credit, don’t hesitate to pay off a high-interest loan ahead of schedule.
Credit card accounts stay active month after month unless you choose to close them. So, if you have credit cards in good standing, never cancel them! A credit card can be your best ally for building credit.
Make one or 2 credit card purchases each month and then pay off the bill in full. This routine allows you to add positive information to your credit file and improve your credit scores without paying one penny of interest.
Having healthy credit is an essential part of improving your financial life and growing rich. It helps you pay less for insurance, get approved to rent an apartment, impress a potential employer, and borrow money at the lowest interest rates possible.
Join me for part 2 of this series where we’ll cover the remaining 3 rules for how to build credit as quickly as possible when you have bad credit.
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More Articles and Resources You Might Like:
How to Get Out of Debt Faster, Part 1
Settle Debt or Pay in Full—What’s Better for Your Credit?
Credit Score Survival Kit – a free step-by-step tutorial to check and build your credit
Money Girl’s Smart Moves to Grow Rich – get the paperback or ebook today!
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.