Grads, Clean Up Your Credit
College is coming to an end, and the only credit you've ever thought about is the kind you need to graduate. If you're lucky, you came out unscathed. Otherwise, you're likely to be in one of two boats. Find out where you stand by getting your credit report and score from myfico.com, and then proceed with a plan.
Bad-case scenario: You have no credit
You don't need a credit report to know that you never used a credit card and never took out any loans. Unfortunately, now that you've left school, getting a line of credit is slightly more difficult than it was before.
Apply for a secured credit card, which requires a deposit at first but if chosen correctly can eventually be converted into a regular credit card account. The deposit may range from a few hundred to several thousand dollars, which also determines your credit line. In the secured credit card business, there are plenty of lenders out there looking to take advantage of desperate borrowers, so do your research. Many of these cards have unnecessarily high fees and interest rates. Check Bankrate.com's list of issuers, or better yet, check your credit union for more reasonable card offers. In general, look for a card with no application fee and a low annual fee (every secured card has one). Also make sure the card reports to the credit bureaus: Equifax, Experian, and TransUnion.
Like any card, make sure to follow the general rules of good credit–pay on time, don't spend more than you have, and pay as much as you can each month. Then, once you've established a bit of good credit, after six months or so, call the creditor and ask for a better rate, says Michael Furois, a financial planner in Phoenix. Most creditors will be accommodating. "They want these customers for life," he says.
A retail or department store card, which is typically easier to get than a regular credit card, is also an option, but it also usually has extremely high interest rates. You shouldn't have more than two store cards, and never keep a month-to-month balance. Another credit-builder is a small personal loan from a credit union. Take out the loan if you need it, but don't get it just to build credit. It might not be worth it in the end.
Worst-case scenario: bad credit. Really bad credit
So you've completely mismanaged your financial life. Now you want to clean up, move on, and learn from your mistakes. Unfortunately, at least for the first point, it's going to take some time. Typically, it takes seven years for black marks to fall off your credit report. The only real way to improve your score is by proving your responsibility over time, showing that the mistakes of the past won't be repeated.
The one thing you shouldn't do is pay someone to improve your credit score. No one can make a couple of phone calls and instantly repair your credit, says Furois. The only way to increase your credit score is by not getting more credit, punctually paying your balances, and letting time run its course. "There is no quick fix," he says.
The long-term fix, on the other hand, is a matter of lifestyle choice and discipline. Kicking bad financial habits can be as tough as dieting or quitting smoking. If you're not too far in debt and most of your problems have to do with paying on time or creeping too close to your credit limit, set up a budget and calendar, and start using automated payments. Give extra care to bills that are due quarterly or semiannually–they're easy to lose track of.
But if your problems run deeper and you're in serious debt because of overspending, then it's time to take a hard look at your lifestyle. "The fact of the matter is there are only two choices. You can spend less or earn more," says Furois. That means cutting down on spending and putting that extra money into paying off debt.
Find advice on credit and debt management from the National Foundation for Credit Counseling, or if you're still in school, see if your college offers counseling services. But be careful. There are plenty of shady counselors ready to rip you off, and the NFCC is where you can find one who has your best interests in mind.
Some tips if you're trying to get your credit under control by yourself:
• Consider which debt to pay off first. If you're trying to be debt free as quickly as possible, pay off the credit line with the highest interest rate first. However, if you're trying to raise your credit score, pay off whichever account is closest to its limit.
• Don't apply for more credit if you don't have to. The more applications for credit, the worse it looks.
• Don't close or consolidate accounts. If you shut down your oldest accounts, it will make your credit history look shorter than it actually is.
• Depending on how bad your credit is, you may have to consider filing for bankruptcy. It will look awful on a credit report, but if your score is trashed anyway, it might be the only way to start anew. Before you can file for bankruptcy, you must go through a government-approved credit counseling program; check the Department of Justice's list of approved services. One word of caution: If a large part of your debt is in the form of federal student loans, you might be out of luck–filing for bankruptcy won't relieve you of the obligation to pay them off.
More about credit:
• Building Good Credit: A Guide for Young People and Parents
• Who Checks Your Credit Report?
• Putting Teens on the Path to Good Credit