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Twenty years ago, when I was trying to get a handle on my flawed credit, I applied for a $1,500 loan for a dinged-up Mazda.
The loan officer was all smiles when I handed her my application. Then she ran a quick credit check.
Her smile disappeared.
“We won’t be able to help you today,” she said coldly, as she slid my loan application across the desk. “Thank you for coming in.”
That was just one of many humiliating moments I endured while living with poor credit.
It can be difficult to maintain good credit when you make $9 an hour, as I did at the time, and have no credit card for emergencies. Even a $400 car repair is a potentially devastating setback.
What is a good credit score? Generally, a good credit score is considered 700 and higher (on a scale of 300 to 850).
Unsure of your credit score? Credit Karma features VantageScore 3.0 credit scores provided independently by TransUnion and Equifax. But the lender will likely use a different scoring model altogether. Though your scores may vary, they’re all based on information in your credit reports. So focusing on what’s in your reports could help you build your credit overall.
The good news is that I was able to turn my credit around within three years and went from feeling nervous when I applied for credit to feeling confident that I’d be approved. It wasn’t easy and it wasn’t instant, nor will it work for everyone, but here’s how I did it:
1. Clear up old debts
There is not one way to do this. I went to a free nonprofit consumer credit counseling agency and signed up for a plan where they used my money to pay a monthly specified amount toward my debts. After each debt was paid, the agency added that payment amount to the monthly payment of the next lowest debt. It took about 18 months to eliminate all my debt.
It’s important to find a reputable nonprofit with free or low-cost credit counseling. To start, check out the National Foundation for Credit Counseling, which has offices in all 50 states.
Pro: By taking concrete steps to pay off debt, I began to realize that a good credit score one day might be possible.
Con: This method could have gone badly if the agency paying my debts every month hadn’t been honest with my money. It’s a good idea to check reviews and Better Business Bureau ratings and complaints for any consumer credit counseling agency you choose. You can always contact your creditors directly and request a repayment plan without incurring a monthly fee or using an outside agency.
2. Pursue opportunities as they arise
Even though I paid my earlier debts, I still couldn’t get a credit card. This was because my credit score was still too low thanks to previous late payments, which generally stay on your credit report for up to seven years. I received a credit card offer from a major department store, accepted it and received the card the next week. I probably should have researched the card to ensure acceptable interest rates, fees and terms, like you can do through Credit Karma with our picks for best secured credit cards. I was just excited to be offered a shot at rebuilding my credit.
Around the same time, my student loan servicer called and offered to take my student loan out of default if I sent six prewritten checks for six months’ of future payments. Six months later, my student loan was no longer in default.
Pro: Because I was open to ways to rebuild my credit, opportunities appeared. I got lucky with the pre-approved credit card, but I also wonder if paying off all those earlier debts with credit counseling helped this happen?
Con: If I hadn’t been careful with how much I charged on the pre-approved credit card, I could have ended up further in debt.
3. Carefully re-establish credit
Once I got the department store credit card, I was determined to do it right this time. I charged a small amount every month, usually less than $30, and paid it off in time and in full each month.
Pro: This method helped me establish at least one solid piece of good credit history.
Cons: I exceeded my $30 self-imposed limit one time and had to sacrifice other things I wanted in order to pay off the balance that month.
4. Apply for a secured credit card
About a year after I established good credit with the department store card, I still got denied for a major credit card. I applied for a secured credit card, which required a deposit of $200 for a $200 line of credit. After making six months’ of payments on time, that line of credit increased. A couple of years later, I was approved for an unsecured credit card with a much higher limit.
While re-establishing credit, it’s important to make sure the secured credit card company reports your payments to major credit bureaus so they’re reflected in your credit score.
Pros: The secured card enabled me to have a credit card for travel and emergencies and to further build good credit.
Cons: Secured credit cards require a deposit, don’t generally offer rewards and can have higher interest rates than unsecured credit cards.
5. Seek out a reputable lender who specializes in ‘subprime’
Historically, in the United States, subprime borrowers have been defined as those with a FICO credit score under 640, which may make it more difficult (but not impossible) to get a car loan.
In my case, I could not get a car loan while gradually rebuilding my credit. After my humiliating bank loan application experience, I applied for a loan with a subprime lender but only after checking the lender’s grade and reviews at the Better Business Bureau. You can’t be too skeptical here. And alternatively you can save a set amount each month and buy a car with cash once you’ve saved enough. It will be cheaper, since you won’t be paying any interest, but it will obviously take longer.
In my case, this lender made loans to customers who have lower credit scores. I was approved for the $1,500 loan with an interest rate of around 18 percent, and I made $100 payments for 18 months. On this repayment schedule, I ended up paying about $200 in interest, bringing the total cost of the car up to about $1,800.
When my car died a year and a half later, I was quickly approved for a new $6,700 loan for a better car by the same bank that had earlier denied my loan application.
Pros: The card loan, along with my on-time payments, helped me build more solid credit and, along with my other efforts, finally pushed me into the land of good credit.
Cons: I paid a much higher interest rate than I probably would have gotten had my credit score been higher. When that car died, I still owed $300, which I still had to pay.
Despite having poor credit, I persevered. Today I have near-perfect credit and no trepidation when applying for a loan. Steady progress and seeking out ways to build good credit history, despite a few roadblocks, paid off with a better life.
While my specific approach may not work for everyone, dedication can be instrumental when working to improve your credit health.
The expert’s take
Credit Karma asked Terry Clemans, executive director of the National Consumer Reporting Association, to weigh in on Deb Hipp’s credit journey. While her plan was good overall, Clemans offered four additional factors to consider when rebuilding your credit:
1. Beware of red flags
If you seek help from a credit counseling agency, beware of companies that claim to be a consumer counseling agency but are actually in business as credit repair firms, says Clemans. “You need to vet carefully entities that are not part of the National Foundation for Credit Counseling (NFCC) to make sure they are truly credit counseling,” says Clemans. “There are lots of shady folks in that space.” Organizations listed in the NFCC are “upstanding, good organizations” that work for free or with a low-cost, needs-based or nominal fee,” he says. Clemans recommends checking out any credit counseling entity through both the Better Business Bureau and the local state attorney general.
2. Ask about credit reporting
When it comes to pre-approved credit card offers, compare interest rates, terms and conditions and make sure the card reports to major credit bureaus. Also, don’t rush to cash pre-approved checks sent by lenders promising low interest, says Clemans. The interest might be low but in the fine print, there could be a hefty service charge for cashing the check.
3. Don’t assume subprime is the only way
There are alternatives to subprime lenders, such as companies that help people build credit files based on payments like rent.
4. Check reputations
As always, check any company’s reputation, online and through the Better Business Bureau. “Any time you get into subprime lending sources, you have to vet those industries,” says Clemans. “Don’t just look at a slick website or talk to a very self-assured salesperson. You have to be a smart shopper and an informed consumer.”