Bounce back from a credit rating disaster

Millions of Australians suffer from dinged-up credit. Regardless of what has happened to you financially - whether you have gone through foreclosure or bankruptcy or made a seemingly less major financial mistake such as making late payments on your credit card bills - it is possible to rebuild your credit. Here's how.

Review Your Budget

It's critical that you understand how much income you have coming in versus how much you are spending both on fixed expenses (i.e. mortgage or rent payments, car or personal loan payments, etc.) and variable expenses (i.e. utilities, mobile phone bill, clothing, etc.). Until you get a clear picture of your financial situation you won't be able to make changes to rebuild your credit.

Next, identify your financial priorities and make changes like boosting your income and/or reduce your expenses to be able to meet those priorities.

Get a Copy of Your Credit Report

You need to know where you stand credit-wise before you begin working with creditors and making different financial choices to improve your credit rating and standing. You can obtain a copy of your credit report at Veda Advantage. Request a copy and review it carefully.

If there are any errors, contact the agencies in writing (making sure you keep a copy) and ask them to investigate the issue and make the correction.

Contact Your Lenders

It is always best to contact your lenders or services providers (such as your utility companies or physicians) as soon as possible when you face financial difficulty so that you get their help to stay current on your accounts.

Call, email or write your creditors to explain your financial situation (for example, if you have experienced a job loss or unexpected set of expenses like a medical emergency). Discuss a new payment plan and make a good faith payment to begin improving your account status.

Pay Bills On Time

Credit reports record your payment habits on all type of bills and credit extended, not just credit cards. To improve your rating make sure you pay all your bills on time including your rent/mortgage, utilities, doctor's bills, etc. Keep documentation (like canceled checks or receipts) to be able to prove that you made timely payments.

Stay At Your Job

Job stability is a good indicator to other lenders that you will have the ability to repay a loan. If you have a spotty resume, make the choice to stay in your current position for at least a year or two to build lenders' confidence.

Use New Credit Wisely

Once you have begun working on a repayment plan for your existing debt be sure to use any credit cards or loans you have wisely. Make payments on time, avoid going over your limit and pay the balance in full or make at least more than the minimum payment due each month or billing period.

If you don't have a credit card or you closed your accounts, you may want to consider applying for a new account only after you have consistently stuck to your budget for several months to begin rebuilding your credit history. Use it only for budgeted expenses like groceries or petrol, and pay it off according to the terms of your agreement.

By responsibly managing your credit account, your positive payment habit will be reported to the credit bureaus which will in turn alert other creditors to you being a good credit risk.

Beware Of Scam Artists

You can correct credit report errors and rebuild your credit by yourself. You may choose to use the services of a credible nonprofit credit counseling agency but beware individuals, organisations or "credit repair clinics" promising to fix your credit woes.

For more information visit Australian Securities & Investments Commission.

The Bottom Line

If your credit rating has suffered this past year, you are not alone. Rebuilding it will take time, but it is possible with the right plan.