Editorial Policy

How to make a credit comeback after defaulting

Erica Sandberg

January 17, 2014

QDear Erica,

I have bad credit. I have had credit cards in the past, but was out of work and could not keep up with my payments. Now I'm in default for non-payment. What can I do? — Eddie

AHi Eddie,

There is much that you can do to improve your credit rating! I'll tell you what exactly, but before I reveal the steps, I think it's important to go over just why your credit is so poor.Ask Erica

The reason, of course, is that you failed to honor your agreement with your former creditors. No one is happy when the person they lent money to doesn't repay them. This goes for individuals as well as large financial institutions. Just think how you'd react if a friend asked to borrow some cash, promised that he'd repay you in installments and then disappeared instead. You wouldn't react well, I'm sure, even if he did have a valid excuse.

Yet while you'd probably experience an emotional reaction in that situation, such as feeling angry, hurt or resentful, a bank's action is strictly businesslike. It will either sue the person who bailed, or sell the delinquent account to a collector to recoup at least some of its losses. In both scenarios, credit report and score damage occur — which is what happened to you.

You probably noticed the first sign of trouble when you did not make your payments by the due date. At that point, your banks may have charged you a late payment fee, which increased your balance. When your account became 60 days late, they may have upped your interest rate. As each month went by, the balances kept growing. Worse, because interest compounds and is calculated on balances that already had interest tacked on, your debt swelled and the minimum payments grew ever larger.

I'm not sure how late you are at this point. If you're still hearing from your bank, all you have to do is pay your debts — and continue to pay your balances going forward to improve your credit score. However, if the creditor charged the debt off and sold it to a collector or sued you for the balance, leaving you with a judgment (a court order to pay the debts and related court fees), you've really got a mess on your hands.

However, as I said, you can clean it up. Follow this detailed plan to improve your credit quickly.

  1. Satisfy your obligations. A paid debt always looks better than an unpaid one on a credit report. Evidence of past troubles will remain for seven years, but as soon as the amounts you owe read zero, your credit scores will spike.
  2. Use credit well. If you have credit cards that are still active, use them responsibly from this moment forward. It's not hard. Just charge one small expanse per month and repay it in full and on time. Excellent actions will eventually become more impactful than the dreadful ones because recent activity matters more than older activity.
  3. Wait. Like any reputation, good credit character takes time to create. But by doing the first two steps on this list, in as little as a year, it will experience vast improvement.

Learn from the past, Eddie. Everyone makes mistakes, but smart people identify where they went wrong and change their behavior accordingly. In your case, you need to save money for emergencies, not lean on credit when income dries up and communicate with your creditors the moment you believe that you can't make a complete payment.

Got a question for Erica? Send her an email.