Since the recession, countless people have found themselves facing foreclosure and bankruptcy. Although much of this is due to job loss and the high unemployment rate, out-of-control debt prior to job loss has only compounded the situation.
This doesn’t mean that you can never recover from past credit mistakes and misfortunes. You can start rebuilding your credit today and get back on track financially.
Know Where You Stand
Having a clear view of where your credit rating stands and how much debt you owe is the first step. Request a free annual copy of your credit report and make sure that the information contained therein is accurate.
If the debts are piling up and you are having trouble paying your bills, contact a credit counsellor or financial coach for advice. Bankruptcy may very well be your only option, but don’t be quick to file as your first option. Many times bankruptcy can be avoided, and often it’s not the right solution because it doesn’t adequately address the spending or income issues that caused the financial crisis in the first place.
Begin To Pay Down Debt
Maybe you have consolidated debt or you’re only facing a few monthly payments that you can handle, but you certainly don’t want to carry that debt for long. Focus on which debt has the lowest balance and double up on its monthly payments or pay as much extra as you can on the payments. Once you get one debt paid off, even if it’s the least amount you owe, you’ll feel more motivated to tackle the others.
The problem you’ll face after bankruptcy or a financial crisis is having a poor credit score. This is not the end of the world if you’re committed to living a debt free lifestyle when you rebuild. However, a poor credit score can affect your insurance rates, future employment, and ability to secure affordable housing. For consumers concerned about these issues, rebuilding the credit score becomes much more important.
Simply bringing any outstanding debts current and making payments regularly can help rebuild credit in a relatively short period of time. Some consumers elect to take out loans for bad credit in order to build it back up again. This is the classic case of going back into debt so you can get a better score and go deeper in debt. This may seem counterproductive, but it’s hard to build a credit score without more debt. That’s the catch-22.
Some financial experts will tell you to focus on loans that you can actually afford and not go overboard. They’ll say to never take on more debt than you can handle and be sure that you can make the monthly payments on time. Being late even once could add further damage to your credit history. This is a dangerous strategy and should be used with extreme caution.
One alternative to loans for bad credit is a secured credit card. These require collateral up front, so they pose less risk than traditional credit cards, but your payment efforts are still reported to the major credit bureaus. Most banks and credit unions offer these to members, so remember to ask about them next time you’re in line at the bank. It’s still important to have a balanced budget and never spend more than what you can pay off each month.
In many cases, the best way to rebuild credit is to get a gas card that only lets you use it for purchasing gas. Doing so forces you to only buy something you truly needed, and it makes it much more likely for you to pay it off each month. Your history then gets reported to the credit bureaus and your credit history begins to show good results over time.
Before getting any new credit card, check for hidden fees and read the fine print. Consolidating all of your credit card debt onto one card sounds like a good idea, but what are the true costs involved? Weigh the advantages over the disadvantages in every financial decision you make, no matter how small it may seem.
Matt’s Note: Readers, how do you feel about your credit score? Are you concerned about it or not worried at all.