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Our Financial Wellness Center

REESTABLISHING YOUR GOOD CREDIT

Let’s face it. No one strives for bad credit. Layoffs, illness, divorce, and unexpected expenses are not things that we plan on or look forward to, but they happen. If you’ve gone through a financial hardship and your credit rating has suffered, what should you do?

Fortunately, it is not terribly difficult to reestablish a good credit history. One of the easiest ways to get started is by obtaining a secured credit card. A secured card works just like a regular credit card, but with one difference—it requires a cash deposit. Your credit limit is usually determined by the amount of your deposit. Sometimes the credit limit is equal to the amount of your deposit; sometimes it is a bit more. The important thing is that by getting a secured card, you will have the ability to reestablish a positive payment history.

Before you use the secured card, take a moment to recall what caused your credit to suffer in the first place. Did you have an unexpected hardship, such as a job loss or an illness? Did you take on more debt than you could handle? Did you mismanage your money? Whatever the reasons were, remember that if it happened once, it can happen again.

The next step is to ask yourself if your situation has actually improved. Are you capable of handling new credit at this time? This is extremely important. One of the most common traps consumers fall into is that they do not change their spending behavior to reflect their new financial reality. After suffering a loss of income, for example, many consumers do not adjust their expenses or lifestyles to fit the new situation. Instead, many turn to credit to make up for their lost wages.

Before you even think about applying for more credit, take a long look at your budget. Remember that you have just endured a financial hardship and things are very different than they were years ago when you first started accumulating debt. Write down all of your income and expenses (See our section on “Creating a Budget.”). Once you have your budget on paper, ask the following questions:

Does my income cover all of my expenses? If not, you need to either reduce your expenses or increase your income. Now is not the time to take on more debt.

Do I have any savings? If not, what kind of financial cushion do you have in case of an emergency? It is recommended that you have savings equal to four to six months’ worth of expenses. For many people, it can take quite some time to save this amount of money. Chances are, if you are trying to reestablish your credit rating, you don’t want to wait very long. There are practical issues to think about, such as retaining the ability to purchase a car or home in the near future, should the need or opportunity arise, and most of us need good credit to get those. In order to make sure you are comfortable taking on another monthly payment, pay yourself each month just as you would pay a creditor. Do this for four to six months. Start by opening a savings account with your next paycheck. This way, you will be saving some money and showing yourself what kind of effect new debt will have on your budget. You will be in a better position to evaluate your ability to take on another debt.

Can I afford to make another payment on time, every month? If there is any doubt, do not take on more credit. If you miss payments, you will continue to damage your credit rating, not reestablish it.

How much of a balance can I pay off all at once? It is recommended that your credit limit never exceed your ability to pay off the balance in full. This way, you will never find yourself overextended. Remember, with a secured credit card, your deposit determines your credit limit, so you have some control over the situation. This should make it easier to keep your balance manageable.

Once you begin charging, remember why you wanted the card in the first place—to reestablish your good credit. This means you have to use it wisely. Below are a few tips to reestablish your credit rating.

  • Never bite off more than you can chew. In other words, do not charge more than you can pay off in a month. Do not buy something with the notion that you can pay for it with your Christmas Bonus or a future raise in pay. If you cannot afford to buy an item with cash, do not charge it.
  • Pay more than the minimum payment, and pay off the balance in full every six months or so.
  • DO NOT MAKE ANY LATE PAYMENTS.
  • After six to eight months of making on-time payments, refrain from using the card for everyday purchases, such as gasoline and food. During this period, keep close track of exactly how much you are spending. Remember that you are trying to rebuild your credit rating, not accumulate debt.
  • Once you have been making payments on time for a while, the credit card company may offer you an unsecured credit card. Take it. Since you will still be rebuilding your credit, you may get offers with higher rates. Stick with making more than the minimum payment and the high rates will not hurt quite as much. Over time you will get better offers.
  • Review each of your credit reports once a year for inaccuracies. Creditors evaluate your financial health by reviewing your credit report, so be sure it is correct. (See our section on “Disputing Inaccurate Credit Report Information.”)
  • Eventually, you will begin to receive unsolicited credit card offers in the mail. Do not apply for any unless they offer favorable terms! Just keep doing what you are doing and over time you will see better offers as your credit rating improves. Do not open too many accounts. Having too much available credit can hurt your credit rating, as well as tempt you into old spending habits.

    As you can see, reestablishing your credit rating is not extremely difficult. It can take some time, but with patience and perseverance, you can do it. It is equally important that you understand why you have to reestablish your credit rating in the first place. Maintaining a good credit rating is more than making timely payments. Maintaining good credit requires sound money management and intelligent choices. Keeping your good credit means saying “no” to items you cannot pay cash for. Keeping your good credit requires that you understand why having 13 credit cards does not put you in a good financial situation. And most important, keeping your good credit means you will not have to “reestablish” your good financial reputation ever again.

Post-Counseling Timeline

Financial Education Resources

Learn Now or Pay Later Financial Education Guide Learn Now or Pay Later Young Adult Financial Education Guide Financial Education Guide to save on fuel costs Consumer Guide to Credit Counseling and Debt Management

Financial Management Worksheets

Financial Education Budgeting Worksheet Financial Education Weekly Journal Worksheet Financial Education Monthly Journal Worksheet Financial Education Mid Term Goal Worksheet Financial Education Long Term Goal Worksheet

Cambridge Quarterly Newsletters

Cambridge Quarterly Spring 2014 Cambridge Quarterly Winter 2014 Cambridge Quarterly Fall 2013

Our goal is to assist consumers with the repayment of their debt, and educate them on how to avoid the perils of debt in the future. The information within this publication is designed to provide accurate and authoritative information in regard to the subject matter covered. If legal advice or other expert assistance is required, the services of a competent professional should be sought. All information is deemed accurate and reliable at time of release.