Bad credit, also called "subprime credit" in the mortgage business, will hurt your finances in more ways than just making it harder to get a home loan. Not only will your mortgage interest rate go up, but so will the rates on car loans, store credit cards, and the well-known bank credit cards. A bad credit score can also keep you from getting some jobs. Because of this, it is clear that you need to fix your credit if it has gotten to this point.
You might be thinking, "That sounds great, but how do I do it?" Remember that you didn't get bad credit overnight, and you won't be able to fix it overnight either. But if you follow some simple rules, it's not as hard as you might think.
You need to stop spending more than you can afford first and foremost. Surely, this is a common sense rule, but millions of Americans don't follow it.
Next, stop being late with your bills. When you're 30, 60, 90, or 120 days late on a payment, it shows up on your credit report. Each time this happens, it's factored into the formula that determines your credit score, which means your score goes down.
If you have so much debt that you can't pay it back, you may need credit counselling or even to file for bankruptcy. Neither is a bed of roses or a bed of thorns, but when you get to that point, you have to bite the bullet, be humble, and jump. If you can't make the payments and the interest rates on your credit cards have already been raised to 20% or 25%, these may be your only options.
Set up a monthly budget and keep track of all your spending. If you don't know how much it costs you to live each month and how much you make, you'll never be able to get your finances in order. Once this is done, look for places where you can save money. Hey, no one said this would be easy, but once you make a few changes and practise a little financial restraint, you'll be amazed at how much extra money you can find each month to put toward your bills.
Another important thing to remember is that it doesn't take 5, 7, or even 10 years to fix your credit, no matter how bad it has gotten. If you follow this simple advice, you can get your credit back to good or even very good within two years. Of course, a prerequisite is that you get your current bills under control.
Well, you only need two credit cards. Use one to buy groceries and the other to buy gas, and then pay them off at the end of each month. Switch between the two for "emergency" purchases, but always try to pay them off at the end of the month or keep a very low balance. Buy everything else with cash. To really raise your credit score, you only need two credit cards, which the credit industry calls "trade lines," that are paid on time and, ideally, in full every month. So, if you follow the two-credit-card rule, even if you just went through bankruptcy or credit counselling, you can get your credit score back to where it doesn't hurt in a few short years.
Last but not least, get a copy of your credit report from each of the three major credit reporting agencies—Experian, TransUnion, and Equifax—and look it over carefully to make sure it is correct. Many people who have had credit problems have credit reports that aren't up to date with their current situation with creditors, even after they've paid off bills or made special arrangements with creditors. The bad information can stay on their reports for years, hurting their credit score. After you've done your part to get your finances in order, make sure you get a copy of your credit report. You can find the home pages of the above credit reporting companies by typing their names into any of the major search engines.
Better yet, go to your local bank or mortgage company and apply for a loan, even if you're not interested in getting one right now. After your first meeting and when they call you back, ask them for a copy of your credit report. But make sure it's a tri-merge credit report, which includes information from all 3 credit reporting agencies, or your credit report won't be accurate.
