Q: I am a college student who is just coming out of credit card debt. I opened a number of credit cards a few years ago and needed to work with a debt consolidator over the past 2 years to pay them off. I am finally debt (and credit card) free, but now I am unsure how to begin raising my credit score. What should be my next step?
A: Dear Allan,
First of all, congratulations on becoming debt free. I know it feels good and you should be proud of your accomplishment!
To get a good start on rebuilding good credit, I suggest you start by taking a very close look at all of your credit reports. You can get a free copy of each report at annualcreditreport.com. It is important to make sure that all information currently reported is accurate and up to date. Be sure your debt payoffs are recorded properly. You want to put a positive light on a damaged report. You might consider adding a brief statement to each report (credit bureaus allow about 100 words), explaining what caused you to struggle. This will help those reviewing your reports in the future to better understand your situation and perhaps help them approve your credit request.
My next recommendation is to create and use a "spending plan." A spending plan is a detailed forecast of your income and expenses for each month of the coming year. Creating a spending plan will help you account for all of your income and find extra money available to start a savings and investment plan. If possible, pay the same amount into a savings account that you used to pay toward your debts. Also, be sure to balance your checkbook regularly.
Unless you have a lump sum of money to invest, a certificate of deposit (CD) does not make sense for you right now. This is especially so when you can go online and find banks paying more than 5% interest for online savings accounts. That is a better rate than many CDs currently pay, and the savings accounts are totally accessible if you need to get to the money, unlike a CD which locks the investment for six months to several years.
Now that you are debt free, your first objective should be to create a savings cushion of several thousand dollars. Strive to create an emergency savings fund of three to six months of take-home pay. At the same time, you can begin to rebuild your credit standing by shopping for a high-quality credit card product such as a MasterCard or Visa with no annual fee and a low interest rate. What you can qualify for will depend on the current condition of your credit and your credit score. Since you’ve paid off your debts, you are most likely in better shape than you think.
If the damage to your credit was severe, you might have to start out by applying for a retail, gasoline, or secured credit card. These cards are generally easier to qualify for with damaged credit but you must be careful to understand the fees and interest rates of any offers and avoid the very expensive offers. Many people jump at their first offer, thinking they are lucky to have any credit offers at all. But patience will serve you well in this regard. The more time that elapses between your damaged credit and your application for new credit, the better it is for you- so take your time.
Other loans such as a mortgage loan or auto loan also will help you rebuild your credit, as long as the monthly payments are made on time. And that really is the bottom line for you to remember: Whatever type of new credit you use be sure to make all payments on time all the time. This is the only way to show creditors that you are credit worthy, and over time this will bring your credit score back up. It is often a slow process, so, be patient. There is no such thing as AAA credit in 30 days – no matter what the classified ads might say.
Good luck, and keep us posted on your progress.
Mike "The DebtBuster" Schiano
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