Getting Back on Track: Rebuilding Your Credit One Step at a Time

If you are unhappy with your credit ratings, you are not alone.  According to VantageScore, there are about 220 million scoreable people in the United States, and of that number, approximately 68 million – nearly one third – of them have poor or bad credit scores, which are considered to be 601 or lower.

Luckily, there are many simple ways that you can rebuild your credit to a higher level that you are satisfied with.  This is a process, though, and like all processes, it takes time and effort.

Here are the four basic steps that you should take when you are ready to begin building your credit back to ensure that this time you have a strong foundation and firm understanding of what helps and hurts your credit ratings.  Taking these steps will put you can on the path to financial success and stability.

Assess Your Debt.

Be honest with yourself.  How much of your debt is truly necessary, and how much can be easily cut?  Do you eat out an unnecessary number of times each month? Are you an emotional or impulse shopper?  Do you have cable TV bills that you can switch to Netflix or Hulu to cut down on your monthly payments, or eliminate completely?

Start with reviewing your previous month’s bank account.  Analyze how much of your income went to bills and how much went to surplus expenses.  This can often give you a wake-up call of where your hard-earned money is going to, and open your eyes to areas that you can cut back in.

Once you have a clearer picture of how your money is being spent, make a list of your bills and separate them into two columns.  In the first column, list your monthly bills like rent or mortgage payments, utilities and other ongoing bills that have no reasonable payoff dates, or the payoff dates are more than ten years in the future.

In the second column, list your other bills such as credit cards, car payments or loans that have payoff dates within ten years.  Write down each bill, the current payoff amount and potential payoff date, and the interest rate you are currently paying. This column is your focus point.  

Consider Your Options

Now that you have analyzed your debt and you know why your credit score has been decreasing, it is time to do something about it.  Here is where you consider your options, and you have plenty.

The simplest way to start is to look around your house and see what you have that is disposable to you but valuable to others.  The internet is a treasure trove of available resources to sell your used goods. Sites like Decluttr, Letitgo and eBay are becoming more and more popular as people realize the bargains they can get and sellers realize the ease of getting rid of things that are lying around their house.  If you are not comfortable with online sales, a good old-fashioned garage sale often can bring in enough money to pay off those small bills, giving you the extra cash each month to put towards the bigger ones.

While you are working on decluttering your home and making a little side money, you can also be looking into other ways to pay off the bigger debts that you have in a more cost-efficient manner.  Depending on your credit, you may have the ability to transfer your balances into one credit card. There are many out there who offer a 0% or low interest payment option for the first year, giving you the chance to buckle down and get it paid off.

You can also look into loans that may offer more generous terms or better interest rates than what you currently have. This is where you use your second column to make the numbers work for you. Check into loan sites who will work with you to review your existing loans and help you decide if their options may be able to give you a boost in rebuilding your credit.  Checking out sites like LoanReviewHQ today can get you out of your old terms and into newer ones.

If loans can’t help you or don’t offer competitive rates and terms, you can also look into debt consolidation.  This is a way to simplify your bills by combining them into one monthly bill, usually reducing the interest and lowering your monthly payments.  Be sure you look into the pros and cons of debt consolidation so you know what you are getting into before going this route.

Paying Off the Easy Numbers

Research shows there are mathematical strategies that you can incorporate to help you pay off your bills in the smartest ways.  Mathematically, the “avalanche method” is commonly used. In this method, you list your debts from highest to lowest interest rate.  Then you pay your minimum balances first and apply as much extra income as possible to the balances with the highest interest rates.

Other people use the strategy of proportional payments, or “balance-matching.”  In this technique, you determine how much you pay each month by looking at the total balance on your card.  You’ll pay more to those with higher balances and less to those with smaller totals. This is generally a long-term, ineffective way of paying off your debt.

However, many financial programs suggest paying off your lowest bills first.  This is often called the “snowball method,” made popular by “The Total Makeover” by author Dave Ramsey.

In this strategy, you focus on paying down the bills that you have with the smallest balances, with the hope that as you see your debts get paid off, you would be more motivated to continue.  Here you would do the opposite of the avalanche method. Instead of paying your minimum payments and applying extra to those with the highest interest rates, you would add that extra to your smallest credit cards or other debts.  Once that debt is paid, you apply the extra to your next smallest debt, and so on, until you become debt free.

Use one of these strategies to pay off the easy numbers, and watch your debt deteriorate quickly.

Make a Budget, and Stick to It

There is a reason that every financial guru or debt relief help agency advises you to create a budget – if you stick to them, they work.

You have already done the hard work by assessing your debt and getting that clear picture of where your money is going, even if it hurt you to see it so obviously laid out.  Now you have to take charge of how you are spending your money in your new, financially secure lifestyle.

Creating a budget starts with determining how you want to lay out your information.  Some people prefer the technology options, and there are many free budget templates available to use.  Others would rather use the old-school, tried and true paper and pencil method. Whichever way works for you does not matter – what matters is that you create your budget and stick to it.

Once you have determined where you are going to record your information, make a notation with your net income – how much you bring home each month – at the top.  This should include all of the money you have coming in, including extras like child support, that you can consistently count on.

You have already tracked your spending habits, so now you need to set goals for each category.  Your bills are already accounted for, so include those in one category. Household expenses, clothes, entertainment, food, and other extras that you notice can get out of hand should go in their own separate categories.

Now that you have categorized your spending habits, make a plan for how you are going to control how much you put towards each category.  You may need to adjust your habits and spend two hours a week making meal plans and grocery shopping rather than eating out at restaurants.

Put your plan into action and continually check back in your budget.  Are you staying in your ranges and meeting your goals? If not, what can you do to accommodate your new, financially focused lifestyle and still enjoy your old interests?

After you see that you are meeting your goals and have extra income, you can apply that excess to your debts with whatever strategy you chose, and notice that your bills are steadily decreasing with your increasing financial stability.

Monitor Your Success

Keep checking in with your columns and budget with your old lists, so as you cross off paid off debts you see that success piling up.  Celebrate even the little successes and keep that momentum building.

Along the way, find a free and reputable credit monitoring site – many credit cards provide them at no charge to their customers – and watch your credit rating improve steadily.  You are rebuilding your credit in a take-charge manner, and you are now on your way to financial stability for yourself and your family!