By Laura Mohammad
You've had a string of bad luck. Maybe there's a medical bill hanging over your head. Or perhaps you've had a few late payments to your landlord. Either way, building your credit can seem like a daunting task when you have black marks on your credit report.
Landlords don't want to rent to you, and lenders don't want to do business with you.
But if you follow a few sure-fire steps, you can build your credit enough to buy your own house or your own car. Here are five steps to take to get your credit where it needs to be.
Before you do anything, take out your credit report at AnnualCreditReport.com.
Read the report carefully, checking for accounts you don't recognize, incorrect addresses or other hints that your credit has been high jacked. If you see any errors, dispute them immediately, preferably by snail mail. (You run the risk of foregoing your right to sue if you dispute online.)
If you believe your identity has been stolen, you can place a fraud alert on your account with one credit bureau and it will notify the other two for you. The three credit bureaus are TransUnion, Experian and Equifax.
Tip: You have free access to each of the three major credit bureaus' reports each year. Rather than taking them all out at once, take a different one out every four months.
Do you see problems on your account that are accurate? First off, don't dispute them. Instead, you need to own up. Of course, it's always best to pay your bills, but if you are struggling to make ends meet, you might be able to work out a deal with the creditor.
The only problem is, the fact that you were late and that you didn't pay may remain on your credit report for seven years. However, the worst thing you can do is to ignore the debt. Pay it off, then over time, the unpaid notations will get older and have less importance to your account.
Tip: Make sure the creditor notifies the credit bureaus that you have resolved the debt. Get the agreement in writing.
Let's say you have debt but no cash to pay it off. Craigslist to the rescue. Look around your house or apartment for items you no longer need or want. Hold a yard sale with friends. Offer to walk neighbors' dogs or house sit their cats.
Tip: It's actually easier to make money than to save money. Look at taking a temp job on the side, or freelancing with a skill you have. But give yourself permission to quit once the debt is paid off.
Now that you have paid off your debts and you have cleaned up your credit reports, you're ready to build your credit, right? Not so fast. Now you need to make sure that you understand your budget.
Spend a month tracking every penny -- even those lattes -- and see if you are spending more than you are bringing in. You will probably find that you are spending money on things you don't really need or want.
Now create a realistic budget, taking into account what you've learned about your spending habits over the last month. Still over budget? Renegotiate your phone bill. Get rid of cable. Look for monthly charges that you don't recognize. Rein in your spending until you have a little left over each month.
Tip: Make sure you give yourself money for fun. Nothing destroys a budget like austerity.
Now it's time. You are going to use a credit card now -- but this time, not for buying cool stuff, but for credit building.
FICO is the dominant scoring model that lenders look at to decide if you are creditworthy. FICO favors consumers who use a credit card responsibly. It may seem counterintuitive, but there you have it.
So, if you have a credit card, you are going to start putting a small charge on it each month for something you would buy anyway, such as gasoline for your car. Then, you are going to pay it off in full and on time each month.
Don't have a card? Apply for a secured credit card, which means you will put a few hundred dollars down in exchange for a few hundred dollars credit. Make sure the charge you put on the card is very small, because FICO tracks how much debt you have compared to how much credit you have available.
Tip: Make sure the card issuer reports to the credit bureaus. Otherwise, there's no point to having the card.
Follow these steps for a few months, and you will see your credit score start to climb. (You can check your score for about $20 at MyFICO.com.)
Ideally, you want your FICO score to be above 760 on a scale of 300 to 850, but anything above 700 is pretty great. You will find that lenders offer you better rates, landlords are more interested in you, and you can finally get your dream car.
Just be patient and consistent, and you will reap the benefits of being a responsible consumer.
Laura Mohammad has a background in personal finance, with a specialty in credit. She is the editor of PersonalLoanReports.com, a site that advises consumers about personal loans, peer-to-peer loans and business loans, as well as credit and credit building.
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