FDIC Consumer News
Establishing or Rebuilding Credit Scores: Options for Moving Forward
Your credit scores are prepared by FICO and other companies and are mainly based on your history of managing debts, such as whether you tend to make payments on time. Your scores play a significant role in your everyday life because the next time you apply for a loan or a credit card — or perhaps a new apartment or insurance —your scores could affect the final decision, including your costs.
For the many consumers with damaged credit scores and those with no credit record, here are some ways to improve your credit scores.
Consider consulting with a reputable credit counseling service. It can help you develop a customized plan to improve your credit score, which may include helping you decide how to prioritize your spending choices. Counseling services are available to help consumers budget money, pay bills and develop a plan to improve their credit histories.
Bear in mind, however, that not all counselors are looking out for the consumer's best interests. Be cautious of counseling services that advise you to stop making payments to your creditors or to make your payments to the counselors instead (so they can negotiate on your behalf with the lender). These programs can be costly, may result in your credit score becoming even worse, and they could be scams.
For suggestions on finding a reputable counseling service, visit the Federal Trade Commission's website.
Understand what information is most likely to influence your credit scores. In general, the most significant factor affecting your score is whether you repay debts on time. Also important is how much you currently owe on each account compared to its original loan amount or credit limit. Additional factors include how long you have had your current loans and credit cards and the types of credit accounts you have (for example, managing both a credit card and an installment loan, such as for a car, could be viewed more favorably than just having one of those two loans).
Obtain and review a copy of your free credit report. Credit reports, produced by credit bureaus, detail each person's financial history, and they are used to develop credit scores. Under federal law, you can get at least one free report from each of the nationwide credit bureaus every 12 months. If you find an error, contact the credit bureau directly and correct the record.
To order your free annual report from the three major credit bureaus — Equifax, Experian and TransUnion — visit www.AnnualCreditReport.com or call toll-free 1-877-322-8228.
For information on your right to see and correct reports from "specialty" credit bureaus that, for example, track a person's history of handling a checking account, visit the Consumer Financial Protection Bureau's website.
Credit reports detail each person's financial history and they are used to develop credit scores. Under federal law, you can get at least one free report from each of the nationwide credit bureaus every 12 months. If you find an error, contact the credit bureau directly.
If you cannot qualify for a regular credit card, consider a no-fee or low-fee secured credit card. This is a credit card for which you would keep money (as collateral) in a deposit account at the financial institution issuing the card.
For example, if you want a card with a $1,000 limit, you might deposit that amount into a savings account at the bank offering you the card. The lender would report how you manage the card to one or more of the credit bureaus, and often it will provide you the opportunity to obtain an unsecured credit card after a certain period of on-time payments.
Secured cards may have fees attached to them and may have a higher interest rate, so be sure to do your homework before signing up.
Look into having a co-signer if you have no credit history. A family member or friend guaranteeing payment may help you obtain a loan. It is usually structured so that the primary borrower is expected to make the payment but the payment history will be reported in both names. Your co-signer will need to know that if you default on the loan, he or she will be responsible for repaying it in full, and missed payments will be reflected on both credit files.
Consider taking out a small loan. A personal loan from a depository institution can help you establish credit. You may be asked to offer collateral to secure your loan.
Be Patient. "Whether you have been through a foreclosure, bankruptcy, divorce or made mistakes with your finances, the road to recovery is possible," said Angelisa Harris, an FDIC Regional Community Affairs Manager. "The key is to be focused and understand which steps will be helpful in rebuilding your credit based on your specific situation. You won't be able to rebuild credit overnight."
She added that "arming yourself with knowledge, obtaining advice from a reputable organization, and creating a plan can help you make significant strides toward improving your credit rating."
For more tips and information, read the Federal Trade Commission's publication Building a Better Credit Report.