Call it a financial reboot or a fresh start, many people today are in a rebuilding phase when it comes to their credit score. If there is a silver lining in all of this it is that you are not alone. Millions of Americans have seen a decline in their credit scores in recent years. Whether due to a job loss, foreclosure, bankruptcy, or all of the above, you can rebuild your credit in a relatively short time if you follow a few simple steps.
1. Make Your Payments On Time For Any Open Credit Accounts You Still Have
While it may be easy to simply throw your hands up in the air and conclude that since you are behind on some of your obligations you might as well let everything go, this would be a huge mistake. For example, even though you may be in foreclosure you should still keep making your credit card and auto payments on time. By continuing to make some on time payments, you will reduce the overall damage to your credit score.
2. High Balances On Revolving Accounts Will Hurt You
When it comes to credit cards, keeping your balances to 50% or less of your available credit is a big deal. In fact, it is equally as important as your payment history. Even if you pay off your cards in total each month, you should try and avoid ever using more than 50% of your available credit line at any point during your billing cycle.
3. Establish New Credit
Many people that go through a financial downturn decide to simply live without credit at all. This is a very big mistake if you have any intention of returning to a decent credit score in the near future. One of the difficulties is in obtaining new credit after your credit score has dropped. A solution to this is the secured credit card. These cards require that you make a deposit equal to that of your credit line. As a result, they are a 'no risk' proposition for the issuer. You should have at least three open credit cards with on time payments and reasonably low balances and this is an easy way to get there. Do not confuse a secured credit card with the type of card that you can 'load' money on to. Secured credit cards can build your credit just like their unsecured counterpart, while pre-paid cards do not.
4. Mortgages After Foreclosure & Bankruptcy
You may have heard that if you lose a home to foreclosure or if you end up in bankruptcy that you will never be able to get another mortgage. This is just not true. In fact, even with the currently stringent approval requirements having a foreclosure or bankruptcy does not keep you out of the game very long. A foreclosure will likely only keep you from obtaining a mortgage for about two to four years. Even just four years after a bankruptcy you are pretty much in the clear (so much for the '10 year curse').
While many will be surprised to learn how quickly they can regain a reasonable credit standing, remember that it does not happen automatically. You must work diligently at establishing new credit as outlined in this article. The three to four years can easily become ten years if you don't take aggressive action to rebuild your credit immediately after your financial downturn.
5. Documentation Of Rental History Is Huge
After losing a home to foreclosure it is important that you are able to prove that you are making timely rent payments. The best way to do this is to pay your rent monthly by check. Showing on time rent payments for 24 months prior to applying for a new mortgage will be almost as powerful as establishing new credit. There is no more solid proof of your rental history than canceled checks.
6. Build Up Savings
You will need a downpayment of 5 to 10%. In addition to the downpayment, showing that you have some backup money will make you a much stronger applicant. Having at least six months of your proposed mortgage payment in the bank is sort of the gold standard of 'financial reserves.'
7. The Self Employed Need To Create A Paper Trail On Earnings
Many self employed individuals are facing more of a challenge today than ever getting approved for a mortgage. This is due to the fact that many can not prove what they earn. While it may be easier to keep your customer payments informal or even in cash, this will be a major drawback when it comes time to apply for a mortgage. Simply setting up a business bank account and depositing all of your business income in it will create significant documentation of what your business is really taking in. Also, paying yourself a regular paycheck from the business will demonstrate what your 'net' earnings are. The world of no documentation and low documentation mortgages has mostly disappeared and a strong earnings trail is a must for the self employed individual that wants a mortgage today.
Let's start a conversation on this topic. Use the comments section below to share your own story of how you rebuilt your credit after a financial downturn.
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