Getting rid of bad credit is a difficult process. Whether that bad credit is from a lifelong habit of overspending, or one event that causes a set-back, such as a sudden job loss, divorce, or long-term illness, bad credit can really snowball into an overwhelming problem. A bad credit rating can not only affect your ability to get a home, or a car, but it can also impact whether you get a job. Like weight and extra pounds, losing extra pounds won’t happen overnight, and getting rid of bad credit is also not a quick fix, but it can be done. Don’t get down on yourself. That won’t help. Bad credit can happen to anyone in the blink of an eye. It’s not always an indicator that you are mismanaging your funds. One catastrophic event can account for a sudden drop in your credit score…hence the need to monitor what’s going on.
One way to think about getting rid of bad credit is to think of it in terms of putting yourself on a financial diet (gasp I know. I said the ‘D’ word). There will be work involved; it will take time, discipline, and patience. There is no quick fix for getting rid of bad credit. We all know that fad diets don’t work; and neither do gimmicks that promise to get rid of your bad credit for you. Don’t fall for the promises the credit repair programs offer…they don’t work in nearly the speed they claim, and they’re borderline fraudulent. You can read the following information, and afterwards you may want to check out the book Transforming your Financial Diet, from Amazon.
The first step in getting rid of bad credit is a lot like the first step of going on a diet. Just like Day One of any diet, you need to step on the scale. Well, Day One of getting rid of bad credit, you need to get your credit report and score. You should be able to get a free credit report from each of the major three companies (Equifax, Experian, and TransUnion) at least once a year. Stagger your requests so you can monitor your credit history every four months. It is important to look over your credit report for accuracy. Having your credit score and report will help you devise an appropriate plan of action for getting rid of bad credit.
- Check your report for errors. You have the right to dispute errors in your credit history.
- Check the balances owed on loans and credit cards. Make sure those match the current balances.
Next, develop a plan of action that is reasonable. If you haven’t been paying your bills on time, start now. This is huge. Some financial advisers estimate that on-time payments make up 35% of your credit score. Set up reminders on your phone, sign up for reminders to be sent by email or text, enroll in auto-pay, and/or set up online bill-pay with your bank. These are great tools if you have a steady flow of income that matches the bills. However, if you’re struggling to make ends meet, contact your bank and credit card companies to work out payments that will keep you in good standing with them, yet works within your budget. It is possible to negotiate everything from interest rates, late fees, and minimum payments, even the date the payment is due. Be honest about your situation. This can be scary, or embarrassing, but most companies and banks would rather get some payment than nothing at all. Making these calls can go a long way in preventing a bad report in the first place.
If you find yourself in a position of having to choose which creditor(s) to pay, there are some bills that should way heavier in your decision making. Falling behind on the mortgage, rent, or car payment will have a bigger impact on your credit score in the long run. After making the full rent, mortgage, and car payment, the best option is to make some sort of credit card payments.
Consider putting your credit cards away for a while; lock them up in a safe or safe-deposit box. Get rid of the temptation to keep adding back to the balances as you pay them down. Focus on paying off the smallest balance first. Make more than the minimum payment, if at all possible, on that one balance until it is discharged. You don’t have to close all of your credit cards, even if you pay them off; that won’t have a big impact on getting rid of bad credit. In fact, you shouldn’t close them. Just keep one or two for emergency use only. It actually works in your favor to have a long history of credit with a company than to have a bunch of closed accounts, which will still show up on a credit report. So pay off the debt, but keep the credit account open.
If you get in a real pickle, it’s not always possible to keep a credit card open. In that case, you will have to go without a credit card until you have been able to get rid of debt. Once you have paid down, or paid off loans and credit balances, check with your bank about getting a secured credit card. The card is backed by a deposit you make with the bank. Typically, your credit limit will coincide with the amount in the deposit; a $500 deposit will allow you a $500 spending limit. It is good to use this credit card, but pay off the balance each month. Some banks will even convert this type of credit card to an unsecured account after a year of good payment history.
Don’t go to the extreme opposite in your spending though. When you are getting rid of extra weight you will have binge days. It is unreasonable to think you will never have a cookie until you are at your goal weight. When you are getting rid of bad credit you will need to allow yourself a treat now and then. It is just as unrealistic to say that you will never go out to the movies or out to dinner with friends until such-and-such bills are paid off. Establish a budget that allows for splurges. It is important to set yourself up for small victories along the way so you don’t lose heart.
Even if you blow it, there are still things you can do to stay on track for getting rid of bad credit. In most diet plans, the suggestion to counterbalance a binge day is to walk a couple extra miles, or exercise for an additional hour. There are similar options that will help you get rid of bad credit. Temporarily taking on a second job can loosen up the budget just enough to make extra payments on debt. Get rid of clutter, have a garage sale, use the money to pay down the balance you owe.
On average it can take up to two years to see significant improvement in your credit score. Getting rid of bad credit is going to take a lot of patience. In most cases the only thing that can repair bad credit is a combo of on-time payments, consistent steady employment, and the passing of time. You may want to continue reading some advice, especially from this book: Your Credit Score by Liz Pulliam Weston.