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I have a confession to make: I haven’t always been a good boy when it comes to credit.
In college, I discovered the seemingly wonderful world of credit when MBNA (now owned by Bank of America) issued me a nifty University of Pittsburgh MasterCard with a whopping $5,000 credit limit. Spring break anyone? In fact I did go to Dublin, Ireland that year on spring break (to be fair, I got a $330 roundtrip airfare from PIT-PHL-MAN-DUB which sealed my Gold status at the time), and not surprisingly I ended up racking up several thousand dollars on the card, which I carried with me upon graduation when “surely I’ll be making the big bucks in no time and this balance will be nothing.”
Luckily I did get a job out of college in 2005 – in the executive buying program for an upscale retailer making $45,000 a year, which seemed like a lot until I moved to New York City and then the reality of living in an expensive city and paying real person taxes kicked in. Once my shoebox sized 5th floor walk-up apartment rent was paid for, dry-cleaning for the suits I had to wear daily and, oh yea – eating, was factored in, I was barely breaking even. Oh crap, I forgot to factor in that pesky credit card bill whose balance never seemed to shrink!
Well, long story short I made some dumb decisions. In between apartments, my credit card bill conveniently “got lost” a couple times and a random cell phone bill from college emerged after 5 years and it ended up being sent to collections and onto some sort of local court that was going to garnish my wages. That was my wake-up call and I decided to pull my head out of the sand and get my financial house in order.
Luckily, I had also transitioned onto Wall Street at that point and was making a better (but still by no means luxurious) living and after some tough decisions I came up with a plan to become debt free. To this day, I have zero outstanding credit card balances and a solid credit score, but I am still dealing with the impact of my poor decisions over 6 years later. For those of you who might have made some mistakes in the past and want to increase your score, here are some recommendations to get your credit score back on track. I’m by no means the worlds expert on repairing credit, but all of these have worked for me or others I know.
1) Know your scores and what is on your credit report. I know it’s hard to face the facts when the news isn’t good, but get a copy of your credit report and scan it closely. Annualcreditreport.com will give you a free one every year. It won’t include your FICO score (you have to pay for that), but it will give you a good idea of the challenges you have ahead. Sites like CreditReport.com will give you a free credit score, but it’s not an official FICO score, which is what most lenders use to determine your credit worthiness.
2) Understand that the best way to improve your score is to get out of debt. Maxed out credit cards are the biggest red flag to a credit card company/reporting agency. They can forgive past mistakes, but they usually won’t forgive current recklessness. You may have to make some tough decisions with respect to your budget, but it will be worth it in the long run. While I love to travel as much as the next person, getting out of debt can feel better than the feeling you get in your favorite international destination. I use mint.com, which is a free service that will help you visualize your current financial situation and they’ll even alert you when you get a finance or interest charge. Get motivated by the big picture and stop throwing away money!
3) Dispute incorrect information on your credit report. If you’ve paid off a debt, but it isn’t showing or there’s incorrect information – simply dispute it with the credit reporting agency. The annoying thing about this is that you have to do it for all three agencies (Experian, Equifax and Transunion). Once you have your free report with each, it is free to dispute charges online. However, there are online resources that can guide you through the manual dispute process, which seems to work better at getting adverse items off your report. See the FTC rules on the matter and check out this site for practical tips.
4) Get a secured loan or credit card. They look like credit cards, but you put down a cash deposit, which is your initial credit limit. A good secured card will have automatic reporting to the 3 major credit bureaus and if you are responsible with it, you can start getting credit line increases beyond what you put down. HSBC’s Orchard Bank offers a secured Visa card with a $0 annual fee for the first year and $200 minimum deposit. Your local bank may be able offer you a similar product.
5) Become an additional cardholder on someone else’s card that has a long, solid credit history. Especially with American Express, you will inherit their good standing on the account. This method can almost instantly improve your score greatly. Your bad credit will not hurt the primary cardholder’s credit (unless you run up charges on your card and they don’t get paid).
6) Pay all current bills on time. Every month you pay your bills so you generate a longer credit history and bonus points with the bureaus.
7) Get a real estate loan. The more types of credit lines you have, the more your score will increase. While the APRs won’t be great if you have less than good credit, it can be worth it to build up to a higher score. Per Experian.com: “Lenders recognize that obtaining and maintaining a real estate loan requires more skill and discipline than other account types. People who have real estate loans and pay them on time see an increase in their credit worthiness.”
8 ) Hire an expert to fix your credit report. Let me be clear here – there is no service out there that can get rid of your legitimate debt and give you a great credit score. As I mentioned above, you can dispute your own adverse items on your credit report, but it will take time and effort. There are companies that are experts in getting negative items off your credit report, so if you are a procrastinator (or just hate dealing with financial things), hiring an expert might make sense. Lexington Law, which is generally regarded as a top credit repair firm, will do the dirty work for you. Their fee is $49.95 a month for standard deletion services and paralegal support and I actually hired them to take some minor negative things off my reports that I was unable to take care of myself. They are still working on it, but I’ll be sure to update when the process is done (hopefully with positive results).