3 steps to rebuild a thin credit file
Dear Opening Credits,
I haven't used credit in more than nine years. I got into trouble a long time ago, and I think most of my credit cards were turned over to collection agencies. For the first two or three years they called me a lot, but I moved around after that and now they've left me alone. To be truthful, I haven't even thought much about my credit until lately. Now, though, I think I would like to start again. Where do I begin after all this time? -- Sergio
Welcome to 2013!
Your first task of the new year is to take a trip into the past. Pull your credit reports from all three consumer credit reporting bureaus. You can do this for free once a year at AnnualCreditReport.com. The accounts that went bad should not be appearing on them any longer, but sometimes errors happen. This is especially true when the debts have been bought and sold numerous times by collection agencies. However, don't despair if you find evidence of them. The law is on your side.
The Fair Credit Reporting Act strictly outlines how long negative activity may appear on a consumer's credit file. For unsecured debts such as those incurred with a credit card, that timeframe is seven years from when the accounts were charged off. Therefore, all evidence of the debts you never satisfied should have been purged from your reports around two years ago. Still see them? Simply dispute the information on one of the credit bureau's websites. They have 30 days to investigate the matter. If they find that you are correct, they will notify the other two credit bureaus and all will purge the damaging items from your files.
At whatever point your credit report is empty of garbage, it will also be bereft of beauty. What a lender finds lovely is pretty logical: recent, positive borrowing activity and more than enough money flowing in to cover whatever debt you currently have.
Outside of income (which you'll state when you complete a loan or credit application), the rest of those details will be on your credit reports -- or, in your case, not be there since you haven't had or used credit in ages. There is not enough hard data about you for a financial institution to know if you'd be a good customer or not. Because of that, the chance you'll get turned down for an unsecured account of your very own is high.
Here are some alternatives, though:
1. Piggyback on someone else's account. If you have a friend with excellent bill-paying habits and who has a credit card that will allow them to add an authorized user, you can ask if they'll let you be one for about a year. Their credit activity will be added to your report, so you'll begin to establish a credit history without having to apply for your own. Another upside is that you can charge but won't be responsible for the payment to the issuer (but will be to your generous pal if you use the card). The downside is that this arrangement will only benefit you when the account owner pays the bills on time and keeps the balance low.
2. Have someone with good credit co-sign on a new account. For this method, the other person goes in on the account as an equal partner and agrees to pay if you don't. Such duel ownership is terribly risky, and I rarely recommend it, but it can work if both parties are exceptionally careful. Once you've got about 12 months' worth of good behavior behind you, apply for an unsecured card as an individual and close the joint card.
3. Get a secured credit card. I'm constantly recommending these products to people with a "thin credit file" like you because secured cards are by far the best choice for those re-establishing their credit. Qualification is relatively easy because you put down cash as security and you don't need anyone's help.
That's how you start again -- now learn from your mistakes and keep your credit clean.
See related: How to bulk up your thin credit
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Published: February 6, 2013
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