A Guest post by Darin Sewell
Today’s world is full of people that at one time or another had great credit but for various reasons now find themselves with bad credit. These people now find it hard to get approved for mortgages, car loans, and credit cards with good interest rates and many of them feel helpless and do not know what to do. If you are one of these people then the article below is going to give you an outline of how to fix bad credit and get back on your feet!
Figuring Out the Cause of the Problem
The first step to reversing your credit situation is to figure out why it dropped in the first place and address that problem head on. There are few common reasons for credit scores to fall and 99% of people with credit issues fall into one or more of these categories.
- Too Much Debt
- Missing Payments or Defaulting
- Not Enough Credit History
Too Much Debt – Sadly this is very common today, people were able to run up debt easily then the financial crisis hit and banks slashed credit limits and a lot of people suddenly had credit cards that were maxed out. In many cases payments also doubled making it all around bad situation.
The best way to address too much debt is to figure out what debt you can pay off the fastest; this is generally the account with the lowest balance. Do all you can to pay that account off then when it is paid off take the money that you used to pay towards it and add it on the next account in the list. You will be amazed that after you start paying off accounts and applying more to the next one your debt begins to shrink rather quickly.
I know this is easier said than done but if you are serious about getting to a better score you need to do whatever it takes. This means getting a part time job, eliminate some luxuries like cell phones, cable TV and other money absorbing expenses. Think about how much you could save and how fast your debt would come down if you were not paying those bills and putting the money into debt reduction!
Missing Payments and Defaulting – This one goes hand in hand with having too much debt. Generally, as your debt increases the payments do as well, eventually the payments can be more than your income and you start to fall farther and farther behind. Then the late fees and over limit fees start to pile on and before you know it you are in massive debt.
Honestly, the only way to remedy this problem is to either increase your income or reduce the payment amounts of your debts. Increasing your income is pretty easy; just grab a part time job. But that might not be enough because you are over your limit; the credit card companies can increase your rates and keep charging over limit fees, basically keeping you in this trap.
To counter this problem you need to get in touch with your lenders and explain to them what is going on. Let them know you want to pay them off but are unable to due to the amount of money you owe. Most lenders have some sort of program to help troubled customers; they will more than likely put you on a payment plan. You will lose the ability to use your account but that is probably a good thing!
Keep in mind that you may have to call many times in order to get in touch with the right person. Always be polite and never give up. In the end the lender will want to work with you because they need the money you owe them.
Not Enough Credit History – Many people today have bad credit scores or no credit scores simply because they never had any accounts that reported to their credit report. Commonly these are the people who pay cash for everything and make substantial use of their debit cards. It is only when they need some sort of financing that they realize the situation they are in. While it may seem like a tough spot to be in it is actually very easy to get out of.
To get out of the no credit history mess and start establishing yourself; you will need to work with secured credit cards, personal bank ones and department store cards. Generally the best place to begin is with a secured credit card. These cards work like a normal card and most report to the credit reporting companies.
The only catch is that you have to let the issuing lender hold money that you deposit in escrow; this deposit is equal to the limit on the credit card. Generally, this is about $250-$1000 and if you default the lender has a safety net, if you close the account you get your money back. Because of this safety net approval is almost guaranteed.
After you have a good secured credit card reporting for a few months, apply for a department store card, but make sure it reports to the credit reporting companies before you get it. Make a purchase here and there with it and always pay it off in full each month. After 6 months you will see a positive credit history being reported about you that will improve your credit score ratings. You can then move on to regular unsecured credit cards, just do not let yourself fall into the trap of running up to much debt.
As you can see there are no real magical ways to fix your credit in a few days or weeks, it will take time and effort on your part. But if you can stay dedicated to the process and stick to your plan you can start to make good progress in a 3-6 months and major progress after that. Just learn from your past mistakes, stay focused and keep moving forward!