Do you have problems managing your finances? Are you unable to meet your deadline repetitively? If you answered ‘Yes’ to both questions, don’t feel disheartened; you’re not alone.
According to a report from the Corporation for Enterprise Development, more than 56% of people have sub-prime credit scores and can’t take an advantage of record-low mortgage rates. Why? Because the best interest rates apply only to people who have excellent credit scores.
What is Bad Credit?
Some people rack up so much debt that it becomes almost impossible to make timely principal and interest payments. Repeatedly failing to honor your credit or financial commitments leads to bad credit; this, in turn, reduces your credit worthiness and ultimately affects your ability to access financing.
The good news is you can always improve your credit history — no matter how bad it is.
Overcoming Bad Credit
There are six key techniques you can use to improve your credit score. Just be aware that these strategies will not yield results overnight.
Study your credit report. Request a copy of your credit report, which has all the data that is used to calculate your credit score. Check for errors, including payments and amounts owed that may be listed incorrectly. If you find errors, make sure that you bring these to the notice of credit bureau by sending them a certified letter. List the mistake and enclose verified supporting documents along with a copy of the erroneous credit report with the highlighted mistake.
Set payment reminders or automatic payment. Making consistent credit payments on time improves your credit score, so set payment reminders. Even better, enroll for automatic payments that debit from your bank account. Late payments are reported to credit bureaus — so by automating your bill payment system, you’ll eliminate a big risk factor.
Act. It’s not as easy as it sounds. Control the urge to use credit cards. Then sit down and work out a payment plan that pays off your higher interest credit cards first. Meanwhile, maintain the minimum payments on your other credit card accounts.
Don’t underestimate the power of old accounts. Never close your old account as this makes your credit history look shorter, which can negatively affect it. If you must reduce your cards, then get rid of the newest ones. Or even better, throw the cards in a safe place and just forget about them! Keep in mind that, even if you close your accounts you can’t erase a bad payment history.
Don’t make unnecessary inquiries. Remember, each time you apply or inquire about a credit card, a potential creditor makes an inquiry with the credit reporting agencies. This information is then added to your credit report and remains listed for two years. Multiple enquires can reduce your credit score dramatically.
Become financially responsible. All of your efforts will be for naught if you don’t remain financially responsible and refuse to live within your means. It’s not difficult; you just need to keep the following points in mind:
- Credit cards: Making the minimum credit card payment is not good enough. If you can’t pay your credit card off in full every month, then you’re spending more than you earn.
- Act in your interest: Be able to differentiate needs from wants. For example, having a car is a need, but having a sedan or luxury car is a want.
- Emergency fund: Always be ready for the unexpected. That means being able at all times to support yourself for at least six months without any income.
Once you learn how to free yourself from the chains of bad credit and make yourself financially independent, you have all the tools you need to end up with a debt free life. So why wait?
Photo Credit: Dazzy D
I have found that the behavior of sub-prime credit card lenders can complicate things a bit. I made the arduous trek from from “sub-sub prime” to “excellent” credit in about 8 years, starting with high-interest, low-limit cards that had high yearly fees. I knew what I was getting into, and planned to use them as rungs on the credit ladder. Once my credit improved and I got better cards, I tried to get the early card charges lowered or removed, and was told that they were part of my user agreement. Following my requests, though, the cards raised my credit limit, giving me an incentive to keep them so as to minimize my usage percentage. Once I no longer depended on cards for basic needs, so the usage rate became negligible, I closed the biggest offender. Last week, I got a fee notice from my second oldest subprime card, which I had left open to maintain my history. This card was now owned by an issuer who had more recently given me a high-limit card based on my better score and agreed to waive the fee. The subprime version, though, refused to waive the fee and so I closed it, figuring that my current rating could avoid the hit.
Those are valuable tips, Amanda. Thank you for sharing them!
I have been trying to fix my credit on my own for a while now. It’s slow moving. I’ve been following tips in a guide that says I have to get my credit reports and analyze them for errors or negative items. Then I have to contact each company with an error/negative item and work with them to get it removed from my report.
Is this true? Should I be doing anything else?
That’s the first step, Joe. But it is only the beginning. David laid out additional steps you can take in this article. Please go back, reread his tips and follow them. Best wishes and good luck to you.
Give yourself a financial boost and declutter your life. Drag out EVRYTHING you haven’t used in a while, don’t need, have duplicates of, just no longer want. Have a well advertised yard sale and sell it. Take the money and put it on the loan with the smallest balance (not the one with the highest interest rate.) This will give you a mental lift because the balance of the loan will go down impressively. Then concentrate on paying off this smallest balance. Once you pay off smallest balance move onto next smallest balance. Intellectually paying off highest interest loan is correct, but paying off the smallest balance is more emotionally satisfying because you see first one, then the next loan gone for good. You will tend to stick to making prepayments because you are “rewarded” by occasionally closing out a balance. It’s Dave Ramsey’s “snowball” technique and it works!