Did you know that repairing your credit is just like repairing a fence? In this episode of Wynot Wyoming?, I’m going to explain the steps you need to take to rebuild your credit. We’ll look at everything from removing bad items from your credit report to becoming an authorized user so you can get your credit in tip-top shape.
While working on an old fence that is around my little barn, I started thinking about credit. My father-in-law built this fence about 50 years ago, but now it's pretty beat up. I let it go way too long, so I decided to tear it down so we could put up a new fence. While I was out here, I got to thinking that fixing a fence is similar to the same types of steps that you would take if you need to rebuild your credit.
Out With The Old
Most of you already know that if you need to repair your credit, you're going to need to get rid of some of those bad things that might be on your credit report. This includes items like collections or charge-offs, a bankruptcy or foreclosure in the past, or a bunch of disputed items that need to be cleared.
These are especially important in the mortgage world, where we can't do a loan if you have a lot of disputes listed on your credit report. This is very similar to my fence project. I took the same first steps: getting rid of some of the bad stuff, like old rotten wood and weak posts. This will give us a good starting point to rebuild.
If you need a little bit of help with any of these steps, go ahead and reach out to me and I'll give you some good advice. If you have issues that are a little bit too bad, I might refer you to a credit repair company. However, a lot of the stuff that we're going to talk about today you can actually do yourself.
Replacing The Posts
Getting rid of all that bad stuff on your credit report is similar to the first step I took on my fence project. After tearing everything out and getting rid of the old rotten wood, I had a little bit of a problem: all that was left were a few posts still stuck in the ground with no fence.
This will be similar to your credit report after you get rid of any negative items. You might only have a couple of things—or worse yet, no trade lines left—on your credit report. If you want to have a functioning fence or credit, we're going to have to start adding back in some good positive credit items to your report.
Additionally, if you want this credit or fence to be a good sturdy fence, you're going to need to replace some of the posts as well. If you have a bankruptcy or a foreclosure on your credit report, that's going to be like a few fence posts stuck in concrete. It's going to take extra work and time to get those out. However, rest assured that on your credit report, those types of events do cause less damage as time goes on.
If you stick with the process, you will see improvements. Being able to reuse as many of the good posts as possible saves time and money, and this is just like on your credit report. If you have good positive things on your credit report—such as things that you've never had late payments on or you haven't had too high of utilization—and those accounts are in good standing, make sure you do not close any of those accounts.
You want to keep as many positive things as possible to save time, energy, and money through the process. Once you get rid of all that old stuff, we need to start adding back in the new stuff. Otherwise, you're just not going to have a functional fence or credit to move on to the next stage of life. You're not going to have anything to hold in your horses so to speak.
The Rebuilding Process
Once you get rid of the old stuff, there are really just three principles to rebuilding credit. Number one, we need to build a good history. Number two, we need to manage our utilization. And number three, we need to make sure that we manage our payments on time every time.
Like with any good three-rail fence, we're going to start at the bottom. It's been my experience that when you have the posts kind of laid out, you put the bottom one in first. That's what dictates if everything comes together. If you have the right distances, you can add the other rails on top of it. However, the bottom one is really important.
The Bottom Rail: Payment History
With regards to your credit, that bottom rail is going to be your payment history. So the good news with payment history is that we're really focusing on the more recent past of the last 12 to 18 months. Things that were older than that start to diminish, and they don't hurt you quite as much.
We want to make sure that the most current 12 to 18-month period has all on-time payments as much as possible. If you've had late payments recently, then we're going to start today. Going forward, we're going to make sure we have every payment made on time in the correct amount every time.
A friend of mine named Scott was doing some informational videos on credit repair, and he made this analogy. Your credit payment history is not like a permanent tattoo on your shoulder; it's more like a bruise. And so as soon as you quit punching yourself in the arm, that bruise will heal up and your credit score will start to improve pretty quickly.
Become An Authorized User
Another thing to note is that this new recent payment history will really start to eliminate the old bad history relatively quickly. Again, we're mostly focused on the recent past. One way that you can get that credit history or payment history to reflect more positive payments is by adding yourself to someone else's account as an authorized user.
If you happen to have a friend, significant other, or spouse that has really good credit, an account that's in good standing, and a long credit history, you might ask them if they're willing to add you to that account.
The Middle Rail: Credit Utilization
The second step of the process is to add the middle rail of our fence: credit utilization. With regard to utilization, you want to make sure that you're staying in the sweet spot. If you have bad credit, you really need to be at 8 to 10% of whatever your credit limit is. That's how you will see the very best improvement to your score.
Once you have a pretty good score, you can go above that 25% to 30% utilization, which is a good number for maintaining a score. It isn't going to help you build a score, but it also won't hurt you. To give you an idea of what that looks like, if you have a $1,000 credit limit, you're going to want to make sure you never use more than $100 of it at any given time.
Once you have a good score and you can go to that higher threshold, you just want to make sure that you never go above 25% to 30%, not even for a day.
Avoid Shopping Sprees
I'll share an example: a friend of mine had a Kohl's card with a $500 limit. She went in and bought a bunch of clothes worth $400. She walked out to the parking lot and made a payment for the full amount that she had just spent.
However, the problem was the credit statement cut off that day. The expense posted, but the payment didn't post for a couple of more days. This meant that her credit report showed 80% utilization. Her credit score plummeted, and it took months for her score to rebound even though she made the payment that same day.
The best practice is to not go above that threshold, even for a minute. Use $50 on your Kohl's card, get your Kohl's cash, and then use your debit card for everything else beyond that. They'll be happy to take two different forms of payment.
Call Your Creditors
Another way that you can help the ratio percentage of use is to call your creditors. If you've had a reasonably good history with them, you can ask them if they'll raise your limit. When you call them, ask them what you're qualified for or what you're eligible for to get your credit raised. They're going to say, “what do you want?”
If you tell them $700, that's all you're going to get. But if you let them dictate the terms, it might be more. It's already on their computer, and they know what they're willing to do. They might bump that $500 limit up to $1,000, $1,200, or $1,500. Now, that same $400 utilization is 30%. Instead of 80%.
The Top Rail: Credit History
Now we're moving on to our top rail. When we were doing our tear-out, we left as many good posts as we could—which is similar to the good credit trade lines of your report. However, we are probably going to need to add more good accounts.
Let's go back to that premise of adding yourself to someone else's account. This helps with the payment history, but it also helps with your overall credit history. If you have a spouse, significant other, or family member that's willing to add you to their account, tell them they do not need to give you a card, a PIN number, or access to their account passwords. You don't have to have any ability to actually use that account.
However, if you're listed as an authorized user, you get the benefit of all of their years of hard work. You want to make sure that it’s somebody you can trust and that they trust you. Convince them you're not going to use their account; you just want to use their good history. Also, make sure they haven't had any late payments, that their utilization is really low on that account, and that it has a long history—such as 10-15 years. The first month that this reports on your credit, you're going to get 12 to 15 years' worth of history and, hopefully, good performance.
A Good Strategy For Parents
This tip also works really well for parents out there. If you have teenagers, you can do the same thing. When I had teenagers, we added them to our accounts—but we just didn't tell them. They didn't even know they had that available credit. We didn't want to risk them running up our bills, but we did want them to reap the rewards of our good payment history.
So go ahead and add them as an authorized user. When they get a little bit older and they've established a couple of trade lines of their own, you can remove them once they have good credit. This is a great way to help them get a leg up on the credit game early on in life. And trust me: they'll thank you for it eventually.
In Ferris Bueller's Day Off, one of the famous lines says that life comes at you pretty fast. If you blink, you might miss it. I think that is true of our financial lives as well. Sometimes there's a calamity that happens in the blink of an eye and causes some detrimental impact on your credit. However, I just want you to know there's no judgment here.
I don't care if you have bad credit. That credit score doesn't define you. However, you do have to know that it hinders your ability to get good interest rates on car loans and maybe even qualify at all for a mortgage. We are going to need to take the steps to go through the process, tear out the bad stuff, and add back in the good stuff to get that credit score repaired.
I’m Here To Help
The first step in your home-buying process is to get pre-approved. This gives us the opportunity to look into your credit and start the credit repair process early—before you're looking at houses. The worst thing that could possibly happen to you is to find your dream home but you’re not yet qualified to buy it.
So if you're thinking about buying a house in the next 6 to 12 months, please reach out to me. Let's have this conversation and make sure that we have time to take these steps and follow this process to get you pre-approved for your home purchase. When you find that dream home, you'll be able to pull the trigger on it right away. Otherwise, it’s like me getting my alpacas, bringing them here before I have my fence built, and watching them run amok.
If you have any questions, be sure to reach out to me and I’ll be happy to help. Don’t forget to subscribe to my channel so you never miss an episode of Wynot Wyoming?, my show all about living in Cheyenne. My videos are not all about mortgages; sometimes we talk about the fun stuff to do around town or a new local restaurant establishment to visit. And sometimes, we give you helpful tips like today. Be sure to stay tuned to see what I feature next!