Help! I messed up and now I have a bad credit rating. What can I do?
You get a bad credit rating because you were late in making payments or maybe, didn’t pay at all. This usually happens because you wanted something and it was so easy to buy it with a credit card, but you didn’t think about how the additional payment each month would affect you. Restoring your credit isn’t easy, and will definitely take some time, but it is worth it. You may not realize that potential employers often check your credit rating to see if you are trustworthy. So—bad credit can cost you a job that you want and need.
Just as the first thing you do if your basement is flooding is to turn off the water, with credit, you have to stop adding to your debt. All credit cards should be put someplace that is really hard to get to – wrapped in foil and frozen inside a big block of ice is good! Use cash or since it is sometimes better to use a card, use debit cards that automatically deduct the money from your bank account. Now you go full court press to get yourself debt-free.
In your campaign to a debt-free life, first make a list of everything that you owe so you can implement a debt-reduction strategy. Make a little spreadsheet that lists all your credit cards and other loans such as car loans. For each card or loan, list the balance owed, the minimum monthly payment, and what interest rate is being charged. The traditional way that financial planners recommend to work yourself out of debt is to pay off the highest interest rate items first, while making minimum payments on your other cards. Once that one is paid off, work on the one with the next highest interest rate until all your debts are paid. Then you will be “Free at last!”
While that approach makes the most sense mathematically, there is another scheme that works and that can be more satisfying psychologically. Make minimum payments on all the other cards, and put as much extra as you can against the card with the smallest balance. That way you get that card paid off quickly. This gives you a mental boost and helps you maintain your determination. Once that small balance is paid off, use the money that you were paying on it each month to add to the minimum payment that you are already paying on the next larger balance. That will get paid off quickly as well. Continue doing this until every card and loan is paid.
While you are working on getting your debt paid off, review your credit reports. There are three main agencies that report on credit, TransUnion, Experian and Equifax. You can order a free credit report once a year for each of them by going to www.annualcreditreport.com. Read each report carefully and report any errors to the credit agency. Each agency has slightly different methods for correcting errors so follow their instructions exactly. You may have to deal with frustrations as you go through this process. However, you must get errors off your reports because they can haunt you for years.
Once you get debt-free, your credit rating should soar. However, don’t make the mistake of letting your new creditworthiness go to your head. When you want to buy a big-ticket item, figure out what the payment would be and start putting that amount away in a special savings account until you have enough to pay for it. You might be surprised how prices tumble when you can pay cash, giving you double savings. If you do have to use credit for an emergency purchase, pay your bills on time and get the balance paid off as quickly as possible. That’s the best way to repair your credit rating and keep it excellent.