Dear Let's Talk Credit,
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If I am paying a personal loan off to my mother with the terms written in a contract complete with due dates and interest charged, will it help to rebuild my credit history and count toward my credit score?
Unfortunately, the answer is no. The three major credit bureaus are not set up to receive information from individuals who are extending credit with a written contract. I am glad that you have a formal loan agreement with your mother. When borrowing from family members, it is a great idea to have the terms of the loan written in a contract to help prevent potential problems from developing.
Here are some suggestions to help you rebuild your credit:
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First, pull a free copy of your credit report from AnnualCreditReport.com. If you have any accounts with late payments on your credit report, it is important to make all overdue payments so that your account(s) will be listed as "paid as agreed." For example, if you have a car loan where you missed a payment for two months and then started making your monthly payment amount in the third month, your account would still be listed as 60 days late. You would need to make the two payments you missed and your current month's payment in order for your account to be listed as current. Likewise, if you have any unpaid charged-off accounts, pay the full balance due, if you are able, or set up a payment plan with the creditor or collector.
The next thing to do is add positive information to your credit report each month. To do this, you must make on-time and as-agreed payments on your existing accounts and any new accounts you may open.
If you have a low credit score and may not qualify for a traditional credit card, you might consider applying for a secured credit card. Be sure you choose one that has the best terms for how you plan to use the card and that reports to the major credit bureaus.
Another avenue you might consider is transferring the personal loan you now have with your mother to a loan through a bank or credit union with her as a co-signer. The loan would be reported to the credit bureaus, which could help your credit score. Co-signing a loan is not generally a good idea unless the person co-signing is prepared to make the payments if the other co-signer cannot. However, since your mother trusted you would pay your current loan, she may be willing to co-sign with you.
Keep making on-time and as-agreed payments on your accounts and your credit will improve slowly. In addition, the negative items that caused your credit score to drop should be removed from your credit report in seven years.
Let's keep talking!
See related: How to turn down a loved one's loan request