Bad credit happens and, a lot of the time, it happens to good people. Medical emergencies, bad decisions made early in life–whatever dropped your credit rating and messed up your credit history isn’t important. What matters is what you do now; both to come out from under it and to make sure that, going forward, your credit looks as awesome as possible.
If you are truly drowning in debt and your income–even with future raises–won’t allow you to pay off that debt in a reasonable amount of time, it might be time to consider bankruptcy. Most of the time bankruptcy is something you should avoid. If your debt is extreme, however, it might be the only thing that can save you. The best way to figure this out is to talk with a credit counselor. You can often meet with these counselors for free, at least for initial consultations. The National Foundation for Credit Counseling can hook you up with an expert who will take an objective look at your situation and help you come up with a plan for either repaying your debt, or pursuing bankruptcy. You may even want to consider hiring a credit repair law firm.
It’s true, if you are of a particularly analytical mind, you might be able to crunch these numbers yourself. For most of you, though, your feelings about your debt, bankruptcy, etc might cloud your ability to be rational and that’s why working with an objective professional is important.
Step Two: The Plan
There are two parts of every credit fixing plan: paying off debt and rebuilding good credit. You’re already working on a plan for paying off your debt with your credit counselor. Let’s talk about the different things you can do to build good credit.
Let’s start with little money, since it’s the easiest to work at on your own. While there are some schools of thought that believe in never carrying any debt or credit accounts is the best way to go, we know differently. Lenders do not trust borrowers with no credit histories or with lengthy gaps in their histories. If you want to buy a home, finance a business, etc, you need to prove that you can handle debt responsibly and if you never carry any debt you can’t do that, can you?
The easiest way to prove to lenders (and to yourself) that you can handle debt responsibly is to opt in to a secured line of credit. The easiest way to do this is to take out a secured credit card at your bank. These are lines of credit that use your own deposits as collateral. They also usually have low credit limits, which means they aren’t a huge risk. Take out one of these cards and then use it for, say, your grocery shopping. Pay it off every month and watch your score climb. When you have a steady history of this, you’ll have an easier time getting big money.
If you have terrible credit you aren’t going to be able to do a whole lot of “big money” things like buying a house. You might even have trouble doing medium sized things, like buying a car. It is important, though, that you not let this obstacle stop you from getting the home or car you need. Residence-wise, you can rent for now. Building up a steady history of on-time rent payments can come in handy when you need letters of recommendation for loan officers later.
For other major expenses, like the car you need to buy after your old one breaks down, there are creditors who specialize in working with low income and bad credit borrowers. For example, according to the Consumer Portfolio Services New York Times profile, CPS buys automobile contracts from lenders and then “gives” them to borrowers who might be viewed as troublesome by the original lender.
It is important, to not just jump into business with the first “bad credit lender” you find online. Do some research. Check out their reputations online. Find out if there are any fraud reports or customer complaints against them. Check and see how the company is doing. For example, Consumer Portfolio Services Stock has been rallying, according to Google they also have $161.57M in market capital, leaving the company in really good shape.
Handling both your little debts and your big debts responsibly can do wonders for your credit rating and your self esteem and make things like saving for the future a lot easier. Follow these steps to get out from under your past debts and into the house you’ve always dreamed of owning. Trust us: you can do this! We promise!