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 and an improving economy. 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
About the Author: David Miles is a content writer and editor from Los Angeles, California who works in the field of personal finance.