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We all make mistakes, but we don’t usually expect those mistakes to be recorded long term. When it comes to credit, simple spending mistakes can be a slippery slope. A money shortage followed by bill after bill can leave you feeling like you’re out of options. The good news is that a low credit score is reparable; the bad news is it takes time.
Here are five steps to get you on the road to credit recovery.
When you’ve hit rock bottom, it’s important to remain calm. Request a copy of your credit score and study the breakdown of it. Double check that all the information is correct such as the amount you owe and how late your payments are.
Take as much time as you need and ask: Were you spending more than you were making? Did you forget the due dates of your bills? It’s important to understand where it all went wrong to prevent the same thing from happening again.
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Once you’ve taken the time to study your history, the next thing you want to do is get help from professionals. According to credit expert John Ulzheimer, formerly of FICO and Equifax, “The value of credit counseling is two-fold. Educating consumers on how best to manage debt and use credit responsibly is a tangible benefit of meeting with a credit counselor. The second, more practical benefit, is entering into a debt management program (DMP) which can lower your interest rates, get late fees waived and allow for lower payments to be applied to your balances. Most DMPs, if successfully completed, will result in higher credit scores and little to no debt.”
When you are faced with bad credit, there are two things you should never do. First, do not turn to debt settlement.
“Settlement will never resolve bad credit,” Ulzheimer advises. “Settlements are agreements between a debtor and a creditor to exhaust a debt for less than the debtor actually owes. Settlements are considered to be negative by credit scoring systems so their value is limited to cheaper debt, not credit improvement.”
Second, don’t close your credit card in the hopes that this will improve your score. Ulzheimer explains that closing your card will only lower your score. “You will lose the value of the unused credit limit in your scores when you close the account,” he says. “Credit scoring systems reward you for maintaining low balances relative to credit limits so closing accounts reduces your amount of aggregate credit limit.”
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According to FICO, “Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.” The higher interest rates are just going to put you deeper and deeper in the hole, addressing these first will prevent your situation from getting worse.
Another good piece of advice FICO offers is that while you may be tempted to combine the sources of your debt, you should in fact avoid this because it may just lower your score even more.
Other than focusing on higher interest rates you may want to direct your attention to loans where you stand to lose the most. For example, making a late credit card payment may result in a lower credit score, but car or auto loans that are left unpaid may also leave you without a roof or a mode of transportation. Keep in mind that your late credit card payments will hurt your score a lot less than a car or auto loan.
The next thing you can do on the road to recovery is build new credit. Once your late payments are all caught up and you don’t owe money on credit cards, you need to prove to the credit world that you are trustworthy again. Unfortunately, this may be easier said than done. Credit card companies may view you as a financial risk due to your poor credit history. CreditCards.com recommends trying to get a secured credit card. Different than a typical credit card, this option requires you to put down a deposit in case of an inability to meet your payment deadlines.
Ulzheimer advises, “The best advice to build or rebuild your credit scores is to make all of your payments on time, always stay out of credit card debt as much as possible and apply for credit only when you need it. If you do those three things then your scores have no choice but to be great.”
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Beyond learning to manage and budget your money in order to repay the debt you owe, you may find that the hardest part of this process is dealing with time. Rebuilding your credit score from near destruction is a long journey. The numbers will climb very slowly, but in return, you will feel a weight lifted off your shoulders.
