bad credit: What You Need to Know

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Can You Rebuild Bad Credit?

Everyone makes mistakes, especially when it comes to credit. With such easy access to credit that previous years have afforded Americans, it is the norm to have several credit cards, student loans, car payments, and mortgages. Millions have overextended themselves and are caught in a debt cycle. If this sounds familiar, you may be wondering how to repair your bad credit.

The first step in repairing your credit is to get a copy of your credit report. You should check it carefully to make sure there are no errors that are negatively affecting your credit. You will need to know the statute of limitations for different types of credit (for instance, law suit judgments, tax liens, and accounts sent to collection are on your credit report for seven years. Credit inquiries stay on for two years.) Check to see that nothing is out of date. If your credit report is in order, move on to improving it.

You can use credit to improve your bad credit. Paying your outstanding debt can greatly improve your credit score. For instance, if you start with a FICO score of 670 and pay your bills on time for three months, you can improve it up to twenty points. On the other hand, if you miss payment on just one bill for one month, that score of 670 can tumble to 645 and even as low as 610.

While you are paying off your debt, don’t add more. If you apply for a credit card with a high load of debt, you are going to be given a card with high interest rates. This, combined with your other bills, might make it hard to make payments on time each month. This could backfire and hurt your credit score even more. Also, if you apply for credit cards and get denied, that shows up and negatively affects your credit score.

If you don’t have a credit card, consider getting one. If you use it and pay it off in full each month, it improves your credit and shows creditors that you are reliable. Options include gas cards or secured credit cards (these require that you pay a security deposit and are available to people who are denied other credit cards). Again, make sure not to apply for too many.

Some other tips for building good credit and not spiraling down into debt include charging only what you can afford. Use the card for convenience but not for unnecessary purchases – make sure you can afford to pay the balance in full each month. Never max out your card – avoid this at all costs. It is a very expensive and long process to get out of this kind of debt. If you do have to carry a balance, pay more than the minimum payment each month. If you pay your bill on time and keep your balance well below the limit, it won’t negatively affect your credit score.

A good credit score is vital if you want to get good rates on loans and if you plan on purchasing a home in the future. Creditors and banks are no longer giving out mortgages to unqualified buyers, as they have in the past – you cannot have bad credit. Cleaning up your credit score and managing your debt is the only way to ensure you can get the credit you will need.