If you check in with the Nerds on a regular basis, you know that we recommend checking your three credit reports at least once per year. But what if you finally work up the courage to follow this advice, only to find that your reports are full of negative information?
Don’t panic, we’ll help you deal with the damage. Here’s what to do:
1. Take a deep breath
Staring down the barrel of three credit reports full of delinquencies, charge-offs and accounts in collections is enough to make anyone break into a cold sweat. But no matter how bad things seem, it’s important not to get too worked up. You need your wits about you cope with the problem and move forward.
Also remember that nothing is forever when it comes to your credit – if you take control now, even the messiest report can be improved with time and diligence. So take a deep breath and get ready to get to work.
2. Scrutinize your reports for accuracy
Taking a second look at your credit reports for accuracy is an important next step. Although it might be tough, go through each one, line by line, and check the information against your records to make sure that all of the information is correct. One in five consumers has a mistake on at least one of their three credit reports, according to a 2013 study conducted by the Federal Trade Commission. If you spot an error, start the process of disputing it as soon as you can.
3. Make a plan for getting current with open accounts
If your credit reports show that you’re delinquent on some of your accounts (i.e., you’re significantly behind on payments) your next step should be to contact your creditors and make a plan to get current.
Here’s why: Getting your accounts back into good standing will keep your lenders from eventually selling them to debt collectors. Being sent to collections will do further damage to your credit, but it could also have other negative consequences (see below). As a result, preventing your accounts from slipping into collections should be a top priority.
If you’re nervous about calling up your lenders to try to work out a payment plan, don’t be. In most cases, they’d rather collaborate with you than write off your account as bad debt. Be honest about how much you can afford to pay and see what they’re willing to offer. You might be surprised at their flexibility.
Nerd note: It’s important to remember that getting current on an overdue account doesn’t mean that its delinquency mark will disappear from your credit report; it will stick around for seven years no matter what. But don’t let that discourage you from paying – for the reasons discussed above, getting your account back to good standing will help stop further damage to your credit and finances.
4. Decide if and how you’ll pay accounts in collections
If some of your accounts have already been sold to debt collectors and are showing up on your reports as such, you’ll also need to figure out if and how you’re going to repay those debts. To be clear, paying off accounts in collections won’t remove them from your credit reports – they’ll remain for seven years, just like a delinquency. This is why some people simply choose not to pay accounts that have already been charged off.
But if you can afford it, there are definitely good reasons to pay off these debts. For one thing, you’ll likely avoid racking up additional interest and fees. Also, you’ll avoid being sued by the collector for failing to pay. Plus, all of those annoying calls from collectors will finally stop.
If you decide to make good on your accounts in collections, be sure to communicate clearly with the collectors about your intentions. If you make any type of agreement to settle the debt for less than its full amount or start a payment plan, get the agreement in writing before you pay. Also, once you’ve made your final payment, get a written confirmation from the collector that your account has been paid in full.
5. Clean up your credit habits for the future
The only thing left to do now is to make sure your credit habits stay on the straight and narrow. This is the only way to put mistakes in the past and rebuild your credit profile. From now on, make it a point to:
- Pay all your bills on time – no exceptions.
- Keep your credit utilization ratio below 30% on all your credit cards at all times.
- Pay off your credit cards in full each month.
- Only apply for credit you actually need.
- Keep reviewing your credit reports once per year to gauge your progress.
The takeaway: Dealing with a dicey credit report (or three) isn’t easy. But by removing errors from your reports, getting current on delinquent accounts, paying off accounts in collections and improving your credit habits, you’ll be on course for a brighter financial future.
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