Fixing bad credit takes money … and time

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Dear Debt Adviser,
My husband and I leased a 2008 Honda Accord in May of last year. We moved to another state in November and both of our jobs fell through when we got settled. By February, we were three months behind on the lease payment and credit cards. Needless to say, our once good credit is shot. We both have good, steady jobs now. So if we are not late on anymore payments for the next two years, do you think Honda Finance would even consider financing the car for us when the lease is up?
— Lisa

Dear Lisa,
I think you should each buy a lottery ticket! Talk about lucky. Not the losing-your-job and trashing-your-credit part of your story, but the have-a-new-job and they-didn’t-repossess-your-car part! Now that you are on the mend financially, let’s hope you have caught up with your payments on the car lease and your credit cards. If you haven’t, that’s where you need to start.

Making your payments on time now is not enough if your accounts are still being reported as late to the credit bureaus. It is likely that you are being reported as late each month even if you are paying by the due date, unless you have paid the three months of payments that you missed.

Once you have paid all past-due balances, your on-time payments will begin to help offset the negative listings of late notices for those accounts. The more time that passes where you are adding positive information to your credit report, the less impact the negative listings will have. As long as you don’t hit another financial bump in the road during the next two years, your credit should be showing definite signs of recovery.

Still, no one can say for sure what the credit environment will look like in two years. Credit standards tend to swing like a pendulum from tight to loose and then back again. Right now, credit is tight and more difficult to qualify for than in recent memory. Standards may get even tighter and may stay tight for a while. No one knows, and only time will tell.

I say this not to make you worry but to point out to those who say to me, “I pay my bills on time, and I’m not getting any advantage from the government or the banks,” that once the dust settles a bit on the economy, you will see the true value of a good credit record.

It may well be that with increased government regulation, an emphasis on responsible lending by the banks and new laws like the new Credit Cardholders’ Bill of Rights will mean that only those with a good credit history will qualify for loans at any interest rate, low or otherwise.

The following items will also help improve your credit and increase your odds of qualifying for a loan that you can afford and want:

  • Check your credit reports with each of the three credit bureaus and review them for errors. You can get free copies at Dispute any inaccurate information with the bureau or the company that reported it.
  • Don’t apply for new credit unless you really need it.
  • Keep your credit card account balances below 50 percent of your credit limits.
  • Don’t close old credit card accounts. Your length of credit history is 15 percent of your FICO score.
  • Pay all credit obligations on time and as agreed.
  • Two good sites for more information are for credit score info and for some basics on financial education.

Finally, I’m going to send you a copy of my book, “Credit Repair Kit for Dummies,” to help you get a head start on the next two years. My mother tells me it’s wonderful!

Good luck!

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