- Personal Finance
5 Steps to Fixing Bad Credit
If you are one of the many people with a low credit rating, know you aren't alone. Sometimes good credit turns bad when you take on more debt than you can comfortably handle. It's easier to do than it sounds, especially if you've been granted credit cards with high limits. Maybe you've over indulged yourself with shopping sprees one too many times, or more likely you've had to rely on existing lines of credit when times were tough. Loss of a job or a divorce can cause personal and financial upheaval. In turbulent times some turn to credit cards for every day expenses out of necessity. Having credit available can be a real life saver, but it all has to be paid back sooner or later. If you are struggling to make heads or tails out of your credit situation the time to act is now. The longer you put off tackling this problem the worse it will get.
1 Get Informed
Before you can formulate a plan of action it's time to gather all the necessary information. Find out where you stand by requesting a copy of your credit report from all three credit bureaus. You don't have to pay a single dime to get these reports. You are entitled to one from each credit bureau, once per year, free of charge. Even if all your bills are up to date it's a good idea to look over this information at least once a year. No one is perfect, including credit bureaus. Check for errors, and take steps to correct any you find as soon as possible.
If you have been avoiding collection calls and letters for a while, you may not even know exactly who you owe money to, or how much. Hiding from collectors won't make them go away. It's time to step up and see exactly where you stand.
2 Create a Budget
Creating a budget is a great idea for anyone, whether their credit is good, bad or somewhere in between. There are several programs that can help you keep track of expenses. Some are free, others come with a fee. Paper and pencil works just fine too. The important thing is to start accounting for your money; what comes in and what goes out. Be sure to include all your monthly household expenses, including gas, groceries, utilities, rent or house payment, car payments and auto insurance. Some of your expenses aren't fixed, so estimate them fairly. Find a realistic amount left over you will use to start paying down your debt each month.
It's not a bad idea to see if there aren't ways you can save some money in your budget. Now would be a great time to compare auto insurance rates for example. You could even try calling your existing policy holder and inquiring about a lower rate. Look for ways to save with your weekly grocery budget. If you aren't a great cook now is the time to learn. Home cooked meals are usually cheaper, and healthier. If your car payment is running you too much a month, consider downgrading your vehicle.
A lot of this might seem hard to take, but sometimes the truth hurts! If you've looked over your budget and really can't find ways to cut corners, and you don't have much left over at the end of the month, you could always look into making some extra cash. Taking a temporary part time job, or working more hours if you can, might be necessary to get you out of your financial hole.
3 Reach out to Creditors
Now it's time to pick up the phone and start making some calls. If you've been dodging collection calls for a while this is sure to be anxiety inducing. Try not to get too worked up about it. You might be surprised what you can accomplish by just asking. Lots of creditors are willing to work out payment arrangements. Go down the list of creditors you've obtained from your credit bureau report and see how each is willing to work with you. If you have enough to pay the minimums on each that's great. If not, you might be faced with the tough decision of who will get paid. Even if you can afford to only start paying down one credit card bill, that is more than you have been doing. It's a start, and if you keep at it you will eventually get to the finish line and be debt free.
4 Get Help If You Need It
If you are truly overwhelmed with the amount of debt you have it might be time to call in the reinforcements. Credit counselors can work on your behalf with your creditors and find a payment plan you can afford. They help to consolidate your debt, so you can make just one payment a month to them, instead of many to various creditors. Make sure to do your research if you are going this route. Ask lots of questions and protect yourself, because there are lots of scams out there.
If you are drowning in debt, and really can't see any way to fulfill your financial obligations, bankruptcy is another option to consider. Talking with a lawyer that specializes in bankruptcy can shed some light on the situation. Many offer a free consultation to discuss your options. The laws surrounding filing differ from state to state, but a good lawyer will be able to give you all the specific information you need.
5 Follow Through
You have come a long way in securing your financial future, and turning your bad credit around. Follow through with your agreed upon payment plans. Keep tabs on your budget, and pay all creditors by their due date. Having payments automatically drafted from your bank account can be helpful, if it's available. Keep a calender in a convenient location with due dates that you can check off as bills are paid. Continue looking for ways to save as you revisit your budget each week and month.
Learn from your mistakes. Sometimes debt in incurred through no fault of our own. Medical bills can be outrageously high. A single accident or illness can run into the 100s of thousands of dollars, or more. Often debt is accumulated little by little over the years, when living beyond your means. Keeping your budget up to date and accurate goes a long way to keep you on track to your long term goal of re-establishing good credit.
The road from bad credit to good is sometimes a long one. Don't get discouraged if it takes longer than you anticipated to turn your credit around. A great credit rating offers you more flexibility and financial options. Keep that long term goal in mind when doing the tough work. The sacrifices you make now will pay off down the road.