Smart ways to build credit when you're recovering from a financial hardship.
Money Girl
318 MG How Can I Get Credit With Bad Credit?
[MUSIC PLAYING] Hi, everyone. You're listening to the MoneyGirl podcast. [DINGING] I'm Laura Adams, the author of MoneyGirl's Smart Moves to Grow Rich, a fun and practical guide to personal finance. Order the paperback or e-book from your favorite bookseller. 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 death that's already been settled, paid off, and some that doesn't even belong to me. In the decade before the accident, I had four car loans that I paid off early. But none of that 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 show, we'll cover smart ways to build credit when you're recovering from a financial hardship. 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 three rules to jumpstart your credit recovery and improve your financial health. Rule number one, 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 three credit agencies told me that there are probably over a thousand different credit scoring models used 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. Ouch, 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. Annualcreditreport.com is the one and only official site where you can request a free credit report every 12 months. Rule number two, 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 it 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 sooner. They should disappear seven 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. Rule number three, 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 four 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. However, 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 two credit card purchases each month and then pay off the bill in full. This routine helps you add positive information to your credit file on an ongoing basis and improve your credit scores without paying one penny of interest. But what if you don't have a credit card? If you've been turned down because you have bad credit or you're just starting out, it's easy to get a secured credit card instead. A secured credit card looks and acts just like a regular credit card, except that you have to make an upfront deposit against the card's credit limit. You can use a secured card anywhere regular cards are accepted. But if you don't make your payment on time, your security deposit will be used to pay the bill. The trick to building credit with a secured credit card is to use one that reports your payment history to the nationwide credit agencies. In the transcript for this show, I've included two secured cards that will help you build credit and also have low fees. Just visit the money girl section at quickanddirtytips.com, then look for episode number 318 called "How Can I Get Credit with Bad Credit?" Having healthy credit helps you in many ways. You'll pay less for insurance. Get approved to rent an apartment, impress a potential employer, and of course borrow money at the lowest interest rates possible. It's never too late to start building your credit and improving your financial life. For more money tips and advice, be sure to connect with me on Facebook, Twitter, and Google+, my username on Twitter is @laraatoms, L-A-U-R-A-A-D-A-M-S with no space. On Facebook, just do a search for money girl. I love getting your money questions through social media or email at money@quickanddirtytips.com. I'm glad you're listening to Ching. That's all for now. Courtesy of money girl, your guide to our richer life. (upbeat music) (upbeat music) You [BLANK_AUDIO]