3 steps to rebuild a thin credit file
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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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?
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
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.
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.
Send your question to Erica.
Published: February 6, 2013