Get the info you need to rebuild your credit and get some forward momentum in your pursuit of happiness!
My flight touched down at the Modesto airport in October 2007. It was me and two suitcases starting a journey that was new on so many fronts: a new job, a new home address and a new beginning of my credit report! Years of under-employment had left my credit file looking pretty sad. Fast forward to 2014 and after a long hard journey, my determination and patience paid off in the form of a brand new car!
If you have had challenges like mine or worse, the key is to avoid feeling like you have reached the end of a rope. Instead, with a few simple steps and some careful planning you CAN bounce back!
Go it alone
Whatever you do, resist the temptation to sign-up with one of the “we negotiate for you” debt consolidation-type companies. This step is totally unnecessary and will be yet another hit on your credit report. All these companies want to do is collect fees from you and get your cash flowing thru their coffers. Then, they can earn some interest off of your money before they turn around and pay it towards your bills – if they actually pay it towards your bills! There are plenty of stories out there about people who have paid into one of these services only to find out none of the money was taking care of debts! And contrary to what these companies will have us believe, rarely, if ever, will your creditors give you better payback terms because you let a third-party do the negotiations. In fact, some of these negotiators have such a bad reputation that they can actually end up giving you a bad name with your creditors!
If you would rather not take the risk of seeing your cash go towards anything else but your bills leave the third-party negotiators alone. Just roll up those sleeves and grind out your own resolutions.
The big payback
One big issue to handle – getting the government off my back! Years of running a small business had ended with me being on a first-name basis with the tax collectors at the state AND federal level. When the hammer came down a few years ago, it was actually easy to sit down with the people at the Internal Revenue Service and the state and show them just how much their collection actions would cause me “hardship,” and that it would be “in the best interest of the government” to allow me time to rebuild. They marked my status as ‘current but uncollectable’ which meant all collection actions ceased – but when my returns brought a refund forget about waiting for a check to come in the mail. Instead, there were several years of really nice letters reminding me there was a balance due and that I could kiss my refund goodbye! Tough going, but a small price to pay for the peace of mind in knowing that my checking account would be free from the occasional, random dip from the long arm of the government. Keep in mind that the interest and penalties for unpaid taxes are super high and can really compound what you owe so it’s best to bite the bullet and pay as much as you possibly can, as quickly as you can. If you run into trouble keeping up with the payments, be sure to let them know you need to re-structure your arrangements instead of just missing payments altogether.
The keys to this accomplishment: be as forthright as possible about what I could pay, always respond to communications, and ALWAYS file later returns on time. It was a great feeling to get those letters in the mail letting me know my slate with the government was clean!
Another option you should look into is filing an “offer in compromise” – in other words, get the government to settle with you for less than what you actually owe. You will have to give a snapshot of your current finances so your ability to pay can be measured. Be ready to pay either a lump sum amount or make payments.
If it is the first time your taxes were delinquent, and it was due to a certain event, i.e.: a mistake in preparing your return, a serious illness, etc., you can ask for a “first-time abatement” and get the debt canceled.
The big cleanup
The next important step was getting a look at my credit reports. We’re entitled to one free report per year, so be sure to take advantage of this even if you think you know (or don’t really want to know) what is on file. Visit annualcreditreport.com and sign-up [note: this is the only site where the report is truly free so avoid the others with similar Web addresses!]. Avoid signing up for credit monitoring, blah-blah-blah now. Just download and print off your files and go over them carefully. Be sure to challenge anything that looks unfamiliar because there is a good chance what you see might actually be the fault of someone else with the same name! Or, in a worst-case scenario your identity has been stolen and someone opened a credit account or got a mortgage in your name.
The step of looking at my credit file also allowed me to know exactly when my history would improve simply because time was on my side. Most negative things should drop off your file after seven years; some may stay for as long as ten years. Older items dropping off is not always automatic, so follow-up with the credit reporters to make sure items actually come off.
Find out more about your credit report at these links:
Hitting the reset button
A big important step to rebuilding was opening a secured credit card. Most banks are happy to give you a credit card account if you put up some money they keep on deposit just in case you are unable to pay off the card on your own. The best thing about this: your history with the secured card will be reported to the credit bureaus.
If your bank has this service, find out the least amount you need to put on deposit, and then build up a savings account there until you hit the number. It was scary at first to think my money would be locked away and untouchable, but after a few months of using the card for purchases and then paying them off immediately, it was easy to catch a rhythm of making charges, paying on time and taking the balance down to zero after a few weeks. After one year a request to have my card converted to “unsecured” was honored, and my bank sent me a check for the amount that was on deposit and a ‘platinum’ card! Voila!
It’s important to shop around for the best card, starting where you already bank, or with a local credit union. Some secured card companies take advantage of your situation by requiring you to buy insurance or charging you high interest and fees. Other secured card companies open the account, but then fail to report your history.
Heading for home plate
Once you have started making strides, there are a couple of final steps to take. First, be very judicious about applying for credit. Resist the temptation to go for the pitches you hear to “save five percent on your purchase if you open a card…” while shopping. If your history is bad, you will probably be denied, and your credit report will take yet another hit because having too many applications (known as ‘hard inquiries’) lowers your credit score because it looks as though you are desperate for credit.
Another step is to make sure positive things get reported. Everyday bills like utilities, phones, etc., are not reported (unless you default!) but there are services that offer to have your future rent payments listed on your credit report. One of the services, RentReporters.com says (for a $40 fee) they can have as much as two years of your rent payment history added to your credit report. This requires some type of sign-up/fee/commitment from your landlord, so it’s likely this service will be tough to get going if you are already in a lease. It is a nice perk to search for in your next rental situation. Exactly how this type of reporting impacts your overall credit score is a little murky, but if you are always on time with your rent it can’t hurt to have it listed.
You can also ask that the credit bureaus add certain things to your history. This is on a case-by-case basis, so if you have you want something reported, reach out to the big three and ask how to get this done.
Once you have taken these steps to get your reports cleaned-up and recent, positive history added, it can still take a while to find a lender who will want to take a chance with you on a big-ticket item like a new car unless you have a positive history with a similar purchase. This is where some of the smaller car dealers who specialize in alternative financing can help. You might want to buy a used car from a smaller dealer and make payments for a year or two to get further established. Just make certain these payments are reported by the dealer.
A great tool for keeping your head in the game with your credit is Credit Karma. After signing up, you get free snapshots of your profile with a couple of the bureaus, and there are tons of blog articles with great information.
What has your experience with credit been? Comment below – especially if you have suggestions!
Photo: “Money” by TaxCredits.net / Flickr Creative Commons
Also published on Medium.