If you’re reading this article because your credit score stinks, you have my deepest sympathy.
Maybe you’ve taken on debt you couldn’t handle, for one reason or another… Maybe you’ve got a bankruptcy in the recent past… Maybe you just have no credit history – and thus, no credit score…
Whatever brought you to this place doesn’t really matter. What does matter is how we get you out of it.
Before we get started, though, it’s important to get one thing straight: You are not a bad person.
That might feel weird to hear — a little touchy-feely for a financial post.
But in today’s America, there’s a stigma often attached to credit scores. As if the number you get is not only about your creditworthiness, but also a commentary on your morality, your trustworthiness and your overall value as a human being.
It’s none of that. Remember, your credit score is only — ONLY! — about your history dealing with credit.
It’s important to let go of any feelings of guilt or inadequacy that may come with a low credit score. They’re unwarranted and counterproductive — don’t start with a defeatist mentality!
Besides, virtually everyone goes through periods of bad credit — even if it’s just when getting your financial feet under you.
It’s fine. It’s natural. But it’s also not something you want to deal with for very long…
So let’s get you out of your credit hole as fast as we possibly can.
Step 1: Check Your Credit Report
This might seem obvious, but most people neglect to really study their credit report until they need to make a major purchase.
That’s when they find out there are errors.
And there are more errors than you’d think. About 5% of credit reports contain a very damaging mistake — while many more have smaller errors.
And sadly, no matter how timely you are, you can’t make up for someone else neglecting their student loans or medical debts, if they happen to show up on your credit report.
I should know. When we went to buy a house together, it turned out my wife was getting negative credit reports thanks to an entirely different person (with a one-digit difference in the Social Security number who shared a first name) racking up unpaid debts.
It’s a long process getting errors removed from credit reports — it usually takes months, sometimes years. But the nice thing is once those erroneous data points are removed, your credit can shoot up 100 points — or more — in just a few cycles.
That’s why it’s so important to check your credit report regularly. Each of the big three reporting agencies — Equifax, Experian and TransUnion — will give you a free credit report every year.
Plus, plenty of other sites and companies offer free credit monitoring — which is also a smart move.
Step 2: Get More Credit!
It may seem counterintuitive, but one of the fastest ways to repair your credit is to get more of it. That means grabbing a number of credit cards, and getting the highest credit line possible with each.
To be clear — your credit score will probably take a short-term knock when you do this.
The average age of your accounts will go down when you start a number of new accounts. That’ll dip your score.
And you’ll have a number of credit inquiries as you apply for credit cards — that will also make a dent.
But those knocks are inevitable when building up your credit score. The sooner you absorb them, the better — the payoff on the other side is well worth it.
See, the two most important components of your score are on-time payments and having a low credit card utilization.
The more credit you have, the less of it you need to use — which makes for low credit card utilization. And the more accounts you have, the faster you can make on-time payments — quickly building up your credit score.
If your credit score is too low to successfully apply for regular credit cards, you should grab a secured credit card. This works more like a debit card: You deposit a set amount into the account and then can spend that money.
Successfully keep your secured credit card funded for a few months and your credit score will jump — getting you access to traditional credit cards and better deals.
Step 3: Spend… Spend… Spend…
Again, it may seem counterintuitive — if you’ve got problems with credit, most people would tell you to stay away from any credit card debt.
But that’s all wrong.
What you want is to prove you can responsibly handle credit and pay it off in a timely fashion.
So spend a little bit on every credit card you have, every month. It doesn’t have to be much — indeed, it shouldn’t be; you want to avoid any issues.
Buying lunch once a month is good enough — an on-time payment counts the same whether you’re paying off $10 or $10,000. Stick with charging somewhere around $10 — every month, on every card — to build up your credit, with minimal risk.
Step 4: Pay… Pay… Pay…
This is as simple as it sounds. Pay off your credit card debts every month — preferably in full.
I can’t stress this enough: The No. 1 factor in your credit score is on-time payments.
Everything you do should be aimed at creating as many opportunities for you to make on-time payments as possible.
Do that successfully and you’ll be out of the credit rating doghouse in no time.
And as soon as you cross the 580 threshold, you get to the really good stuff…
More on that in future issues.
Editor-in-chief, Unconventional Wealth
P.S. The credit system is one of those things that feels like it’s designed to be confusing on purpose — which means lots of smart, sensible people end up with questions. Luckily, we’re here to help. Send your credit questions to firstname.lastname@example.org and we’ll tackle them in a future mailbag issue.
Ryan Cole is the editor-in-chief of Unconventional Wealth. He’s been covering the alternative investment space for nearly a decade and writing about finance and investment for almost 20 years.
Ryan has walked the walk for years, living a very unconventional life. He’s led snowmobile tours through the mountains of Colorado, settled in Japan for five...