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What’s the best way to rebuild credit? And other FAQs

JACKSONVILLE, Fla. – Before and after our recent story on credit scores, we asked you what you’d like to know about credit. On Friday, Mary Svoboda, the interim president of Jax Federal Credit Union, answered some of your questions.

RELATED: Why bad credit doesn’t have to be a life sentence

Here are answers to some of your frequently asked questions:

What is the fastest, most effective way to recover your bad credit score due to unemployment?

  • Check your credit report at AnnualCreditReport.com. All three reporting bureaus are offering a free, full report once a week through April 2021.
  • Update your household budget, making a plan for your essential monthly expenses, savings goals, and debt reduction goals.
  • Freeze credit card spending.
  • Make a list of your outstanding debts, including balance, interest rate, and monthly payment.
  • Call creditors if you are behind on payments to negotiate a repayment plan.
  • Make a plan to pay down debt; consider debt consolidation or using the “snowball method,” based on your individual situation.
  • Make all payments on time.
  • Monitor your report, and make sure debts are removed from your report as they’re paid off.

Let’s say that I have three different major credit cards, all with zero balances. I’m thinking about closing one of them. Will that help or hurt my credit rating?

  • Closing an account could impact your credit utilization rate, a number that reporting bureaus use to evaluate your current spending habits and your future creditworthiness.
  • If you keep a $0 balance, that won’t change your utilization rate — but let’s run a hypothetical scenario.
  • If you have 3 cards with a $2,500 limit on each, that gives you a total credit limit of $7,500.
  • You spend $2,500 for an emergency medical bill (which would ideally be paid out of an emergency savings fund, but let’s say you paid with your credit card at the hospital).
  • If you have all three cards, then your credit utilization rate is 33% ($2,500/$7,500).
  • If you close one card, that brings your credit utilization rate up to 50% ($2,500/$5,000).
  • Closing a credit card will also negatively impact your average age of accounts, which shows lenders or credit issuers that you can responsibly manage credit over time.
  • Experian.com provides a good overview of when it makes sense to keep or cancel a card:
    • KEEP:
      • Oldest active credit account on your report
      • Limited number of additional open credit accounts, leading to a “thin credit file”
      • Low usage is only motivation to close
    • CANCEL:
      • High annual fee that outweighs benefits
      • High interest rate when you carry a balance
      • Personal struggles to limit spending
      • Interest in exchanging for a simpler credit card, like a savings-secured credit card

What can one do if they have not-so-good credit but they would like to get a consolidation loan to pay those debts and can’t?

  • Find out why your loan application was denied.
  • If you were denied by an online lender, try going to a local credit union to apply in person. Most credit unions have local decision-making authority when it comes to lending.
  • Focus on controlling what you can; make a list of all of your debts, minimum payments, and monthly due dates. Make your payments on time. Pay extra on the principal, if you can.
  • After you’ve paid down some of the debt over the course of several months or a year, consider reapplying. Your debt-to-income ratio and credit utilization ratios should have improved, which may help you qualify for a consolidation loan.

Can an individual repair their own credit without using a credit repair organization?

  • Yes — but it will take diligence!
  • Conduct a thorough evaluation of your credit report, making note of any items that are inaccurate — such as debts that have been paid in full but are still showing as liabilities on your report.
  • Dispute any errors with the creditors AND the credit reporting bureaus. Keep detailed records of calls, emails, and certified letters, as well as copies of any documents to substantiate your claim.
  • Keep paying your bills on time, every time. Pay down outstanding debt.
  • Don’t open any unnecessary new lines of credit.

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