Credit Rehab: A Gen Xer Guide to Fixing Rotten Credit
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Money & Career

Credit Rehab: A Gen Xer Guide to Fixing Rotten Credit

Think it’s too late to pull out of a financial sinkhole? Think again

Photo composite of a man under a credit card with tools looking like a mechanic trying to fix it.
Alvaro Dominguez

Lousy credit can haunt anyone, at any age or in any income bracket. Like the 52-year-old still recovering from losing his house in the 2008 recession. Or the 47-year-old with a bum leg who’s suddenly slammed with medical debt.

They’re everywhere—family guys and divorced men, white-collar and blue-collar.

But they all have one thing in common: “They don’t know the first thing about credit,” says Martin Lynch, director of education at the Cambridge Credit Counseling Corp. in Massachusetts, one of many outfits that help people rebuild their credit.

About 1 in 6 Americans have a FICO score of under 600 (that’s bad). The average score has recently ticked up (to 716), but let’s not get cocky.

A low score matters. It means higher interest rates, which means you could pay (or are already paying) many thousands more for a car, or tens of thousands more for a house.

Make sure your report is correct. About 12 percent have errors, a Consumer Reports survey found. If that mistake was an unpaid debt (half were, in the survey), dispute it (there’s a button to click; it’s free) to clear your record.

If your abysmal score is traced to a credit-record mistake, improving your score by cleaning up the record “can be an overnight thing,” says Todd Christensen, author of Everyday Money for Everyday People and the education manager at Idaho-based Debt Reduction Services Inc.

But it usually isn’t overnight. “For the most part, it can take three to 12 months to make any kind of significant improvement,” says Christensen. Begin by doing the following:

Start paying down your cards. Duh, yeah, but which ones? 

“Pay down the lowest-balance cards first,” advises Tom Quinn, vice president of scores (really) at FICO, “and then go toward the highest balance.” The fewer cards you have with a balance, the more it helps your score, he explains, so five cards with outstanding balances look riskier than, say, two paid up and three with balances.

Also, pay down the ones charging higher interest rates.

Pro tip: Don’t close down those barely used cards, like the one in your dresser drawer that you signed up for in ’97 because they gave you a free t-shirt at the Cubs game. That won’t help, Quinn says, and “could actually cause your score to drop.” 

That’s due to “credit utilization,” or the percentage of your available credit that you’re using, which is the second biggest factor in your score (30 percent). Keeping that card alive leaves some leeway and makes it look like you’re not desperately pushing your limits.

Related tip: Don’t open new accounts, thinking it’ll make your credit utilization look better; that can backfire because the older your average card account is, the better.

Pay your bills on time. Pay, pay, pay. Ignore nothing. This is probably how you got into trouble in the first place. Definitely mortgages and car loans. Even if you’re strapped, pay those, and then pay as much as you can (at least the minimum) on your credit card bill. Your most recent behavior carries the most weight with FICO, Quinn explains.

Get help. You’re not alone—that’s how a vast credit-counseling industry blossomed.

Two organizations certify legit credit-counseling agencies: the National Foundation for Financial Counseling (nfcc.org) and the Financial Counseling Association of America (fcaa.org). Go there to find a nearby company, and they’ll set up counseling.

Lynch, who is president of the FCAA, says that a typical client is simply overextended. “They have half a dozen cards or more. And the interest rates are in the mid to high 20s. They can't afford to keep paying those rates. They're just not going to get anywhere.”

A counselor will bundle those accounts into one payment, work with you on your budget, and, “after a few good-faith payments, the creditor will drop the interest rate.” 

You pay the counseling company, and the company pays the creditors—and the counselors know the smart ways to direct the money.

A counselor bird-dogs those pesky due dates and “provides the education to keep you on track,” Lynch says.

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