If You Have Credit Problems After Graduating — These Are Your Options
If you’re in credit card debt when you finish school or have had other financial setbacks, you might need some help to get your credit back on track.
Fortunately, there are plenty of ways to repair your credit after graduation, especially if you have consistent income. Read on for the steps you need to take.
Understand how your credit score is calculated
In order to boost your score, it’s important to understand what it represents and how it’s calculated.
There are two main credit scoring models — FICO and VantageScore — and both take similar factors into account when determining your credit score:
- Payment history
- Amount owed - this includes credit utilization
- Credit age
- Credit mix
- Inquiries
Knowing these factors (and how to read your credit report) can help you understand and predict how your credit score will be affected by certain actions.
Amounts owed, which accounts for about 30% of your credit score, is heavily influenced by your credit utilization ratio — that is, how much of your available credit you’re using. This generally only takes into account credit cards or lines of credit. However, if you max out your credit cards, your credit utilization score will go up substantially which will be harmful to your score.
If that is the problem you’re facing with your credit score, it’s a good idea to focus on paying down your credit card debt so you can increase your available credit — this alone would be helpful in boosting your score.
Get your credit report and review it carefully
The first step is to obtain your credit report. Make sure to go line by line and check for any incorrect information — such as accounts reporting incorrect late payments or that don’t belong to you. If you do spot inaccuracies, you can file a dispute with the credit bureaus. By law, they should investigate your complaint and, if they find a mistake, revise the report.
If the information that is bringing your score down is correct, on the other hand, you’ll have to work on repairing your credit the old fashioned way — with time and patience.
Most negative information will stay on your credit for at least seven years; however, it won’t always affect your score in the same way as credit scoring models give recent information more weight.
Pay all your bills on time
While only credit accounts such as credit cards and loans are reported every month to the credit bureaus, other bills can certainly be reported if you’re late paying them.
This could include utilities such as your power, cable or cell phone bills, which can sell your debt to a collection agency. If your account is sent to collections, this will be noted in your credit report and your score will take a significant hit — in fact, you could lose as much as 100 points or more.
If you have multiple accounts in collections, a good option is to consult a non-profit credit counseling agency that can guide you through the process of restoring your credit.
Build a positive credit history
If the score issues you’re facing are due to a low “credit age,” that is, a too-brief credit history and lack of information, it’s important to build up your credit. There are two popular tools for this: secured cards and credit-builder loans.
Secured cards. Secured cards require a security deposit up front; typically, this deposit will also be your credit limit. Because they’re backed by a security deposit, these cards have more lenient requirements and are perfect for people with a short credit history. Secured cards can help you build a positive payment history and, if you don’t have other credit cards, help you diversify your credit mix, which accounts for about 10% of your score.
Credit-builder loans. These types of loans are very different from traditional loan products as they’re specifically designed for people with little credit and who want to build a positive payment history. When you’re approved for a credit-builder loan, the lender sets aside the funds in a savings account. You’ll make payments every month until you pay it off; only then will your funds be released to you. The benefit of this type of loan is that they report your payments every month to the credit bureaus, helping you create a history of on-time payments, boosting your score.
Seek professional help if needed
There are several ways to repair your credit depending on the issues that are causing your credit score problems.
If your score is being impacted by correct information, it’s a good idea to consult credit counseling firms, which can help you to learn more about managing your credit, establishing a budget and paying outstanding debt.
On the other hand, if your score is being impacted by incorrect information — whether it’s due to mistakes in reporting or if you’ve been the victim of identity theft — then the steps to take are different.
If you find incorrect information in your report, it’s important to dispute those items with the credit bureau. All of them have online dispute forms you can fill out and, under federal law, they’re obligated to investigate your claims within 30 days of your filing.
However, if you were the victim of identity theft and you have multiple errors in your report, you could consider hiring a credit repair firm to dispute the errors for you.
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