Dear Debt Adviser,
I have recently completed a debt-management program and have paid off all of my credit card debt. Since this was done by closing all the credit cards I used to have, I no longer have any credit cards. I currently have an auto loan that I have been paying on time for a little over two years.
I will be the first to admit that I let my credit cards get the best of me and I let my credit score get down into the 500s. While I am not currently looking to buy a house or take out a large loan, I want to prepare for the future. What can you recommend I do to start rebuilding my credit rating? Thank you for any advice you can give.
Rebuilding your credit is a great next goal for you. Anyone who has the character, patience and commitment to climb out of debt should have no problem tackling a low credit score once you have some guidelines. As you have found, your journey out of debt on the road to financial freedom took some time. The quick fixes and bargain offers to settle debt usually don't help anyone except the party offering to sell the help.
Free help is available to assist you in improving your credit and it's the best help you can get. I want to recommend two resources for you as you begin your rebuilding. The first is MyFICO.com, operated by the credit score elves themselves. You will find a lot of great information there as well as the opportunity to blog with others who are on the same path as you, just further along. FICO monitors these blogs for offensive content, but does not interfere with any decent posting a person wants to make. I don't know of too many companies that allow unrestricted comments about their product on their Web site for public viewing and comment. Score one for the FICO crowd!
Another great resource, if you'll pardon a sort of plug, is the "Credit Repair Kit for Dummies" book. The plug is because I wrote it. It's only a partial plug, though, because I recommend that you get a copy at your local library rather than ordering one on Amazon.com. The book will help you put your credit score in context and give you the skinny on how they work and what you can do to help yourself.
For all of you that won't read any further than this column, here are a few points to consider when repairing credit.
Point 1: There is nothing you can do to remove any accurate negative information on your credit report until it cycles off in seven years (with some exceptions) from the date of first delinquency.
Point 2: Adding new and positive information to your credit report (such as you paid your car loan on time and as agreed) will count for more each month while any old negative information counts for less.
Point 3: You might want to wait another couple of months until the Credit Card Accountability Responsibility and Disclosure Act of 2009, or the Credit CARD Act, goes into effect on Feb. 22, 2010, before you apply for a new card. Once the Credit CARD Act is in effect, credit card accounts will be simpler to manage with fewer surprises from card issuers like:
- Not increasing interest rates on existing balances unless you're at least 60 days late.
- Providing clear disclosure of terms before you open an account.
- Not charging over-limit fees without your prior consent.
- Not charging for accepting payments by mail, phone or electronic transfer.
- Eliminating double-cycle billing, the practice of basing finance charges on the current and previous balance. Under this method, the issuer could charge interest on debt already paid off the previous month.
- And my personal favorite, ending universal default practices, in which your interest rates could be raised because of late payments made to others while you are current with the card issuer.
In the future when you decide it's time to purchase a home or apply for a loan, be sure you check your credit reports first. You don't want to have any inaccurate negative information on your reports sabotaging your hard work improving your credit.
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