How to Rebuild Your Credit after a Catastrophe

Whether your credit has taken a toxic hit from delinquencies or has been wiped out in a clear-cutting due to a bankruptcy, you can minimize ongoing damage and foster a recovery. Here are three suggestions to help speed your credit ecosystem’s revival and some tips to get you through the rough spots until your credit has healed.

Understand what happened

The first thing you need to do is to understand what happened and why. For most people, the problems can seem like a blur. But credit problems can usually be traced to two main causes: gradual accumulation of debt by an extended period of overspending, or an event such as an illness or accident.

Plan for your next challenge

You can remedy the slow and easy overspending trap by developing a spending plan that accounts for all your income and expenses. A spending plan helps you make conscious decisions about where you spend your money and keeps you from slowly sinking deeper and deeper into debt.

A number of different tsunami-like events can wash out your finances. Illness, even if you’re insured, can deluge you with huge amounts of debt. An unexpected and uninsured or underinsured calamity like a house fire or a car accident can make a serious dent in your finances. The way to avoid a repeat is to insure for what you can and save for the rest.

Be sure that your auto, home, and disability insurance policies are adequate to protect you in the event of a loss. Establish a plan to save between six months and a year of living expenses in an emergency account to last you through income interruptions from a job loss or to fund deductibles and expenses not covered by insurance.

Minimize the damage as you move forward

You still need to live through the months that follow a credit crisis despite the complications that damaged credit can cause. It’s important to recognize and to be proactive about situations where your damaged credit may hurt you when someone checks your credit report. Realize that your credit ecosystem is part of your larger financial environment and that each one affects the other.

Damaged credit can affect you far beyond being unable to get a credit card. Some events trigger a review of your damaged credit report while you’re in the process of restoring your financial environment. These events include getting a new job, being considered for a promotion, moving to a new apartment, and buying a car. Here are some details about these events:

  • Employment/promotions: Employers commonly pull a credit report as part of the hiring or promotion process. If you’re up for a new job or a promotion, be sure to have an explanation of what happened in your credit history and what you’ve done since to ensure that it won’t happen again. Mistakes are common; showing that you learned from them is not.

  • Moving: Landlords want to know if you will pay your rent, not just if you’re able to. Bad credit is cause for concern unless you can explain what happened. You may want to offer a larger security deposit to set your landlord’s mind at ease.

  • Car financing: A reliable car is an essential part of making a living for many people. If you’re buying a car with damaged credit, be prepared to put down more money than usual. Be careful of dealers who charge high interest rates and penalties for prepaying your loan. Establishing a relationship with a credit union can be a good way to get a loan at a reasonable rate.

Rebuild your credit ecosystem

Is rebuilding a damaged credit ecosystem a chicken-or-egg puzzle? Or is it a catch-22 situation, with the catch being that you can’t do what you want from where you are? It’s neither, although it can sure seem that way.

Following an oil spill or other disaster, environmental experts show up and analyze the damage. They come up with a plan for what needs to be done to restore balance, and they predict how long it will take for the ecosystem to heal. Your credit score indicates the health of your credit ecosystem.

A low score means that your credit environment has had some damage that will take time to repair. In times like these, getting new credit to show that you can handle it can be challenging. But if you heed the following simple steps, you’ll be growing healthy credit lines and a garden full of blooms in no time.

A toxic credit report and score take time to restore. Slowly rebuilding your report with fresh accounts that you pay on time and as agreed leads to a thriving credit ecosystem again.

Try the following for diversity and a speedy recovery:

  • Secured credit card: Using a secured credit card may help you rebuild your credit and boost your score over time when other products aren’t available. Secured by a cash deposit, many of these cards report every on-time payment to the credit bureaus, just like an unsecured card does. Confirm that the secured account will be reported to the credit bureaus before you open the account.

  • Passbook loan: Open a savings account and borrow the amount that you have on deposit. Just make all your payments on time. This personal loan is inexpensive and grows your credit.

  • Retail store cards: Usually easier to get than an unsecured bank card, a revolving credit line from a retail store can even get you discounts. But use it only when you’re shopping for a need, not when you feel the need to shop.

Checking your credit report and score periodically can offer you a simple measure of your progress. You can get a free copy of your credit report annually at www.annualcreditreport.com. For measuring growth in your credit saplings, check one report every four months; that way you can have three free looks each year.

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