Credit is practically a necessity if you’re buying a house or car. But although getting a credit card and applying for loans can open the door to a great credit history — your history is only as good as the way you manage your credit. And unfortunately, if you’re not the best credit manager, your credit score will suffer.
There is a price to bad credit. Not only is there the risk of dealing with harassing creditors on a daily basis, a low credit score can increase your insurance premiums, make it harder to work in certain fields and result in higher interest rates. It’s certainly cheaper to have an excellent rating; but getting to this point is much easier to say than do. And depending on how badly you’ve damaged your credit, you might lose a few nights of sleep.
However, with so many ways to improve your score and get on the right path, there’s no reason to lose sleep. Here’s what you can do:
1. Communicate with Creditors
You may prefer to run and hide from your creditors, but during hard times, they can become your best ally, offering provisions that will keep your credit score intact. If you don’t have money, ignoring your credit card bills and dodging creditors might be your first instinct. But if you pull a disappearing act and stop paying, creditors will report this negative activity to the bureaus.
On the other hand, if you communicate with creditors, the company might modify your terms or lower your payment, which can keep your account in good standing.
2. Get Creative with Debt Repayment
Even if you increase minimum payments, it might take years to get rid of your credit card debt. For fast relief, you need to. There are several ways to drum up cash to pay off your credit cards faster.
For example, if you have an extra room in your house, you might get a roommate or rent out the space, and put this cash toward debt repayment. Some people have gone as far as getting rid of their car and relying on public transportation or walking everywhere, whereas others stopped shopping for one or two years to increase their disposable income.
3. Negotiate a Better Rate
It’s hard to pay off debt when you’re paying an interest rate in the 20% range. If you have an okay credit score, you might be able to negotiate a lower interest rate. Call your credit card company and ask to speak with someone who has authorization to reduce interest rates. State that you’ve been a loyal customer with the company, and mention that you maintain a good payment record — only if it’s true.
With a good payment record, there’s a chance that the credit card company will approve your request. And once you’re paying a lower interest rate, more of your monthly payments will go toward reducing your principal balance.
4. Start Over and Make Better Choices
You might hate the idea of filing bankruptcy. But instead of running from this idea, assess the possible benefits. Filing a Chapter 7 or Chapter 13 bankruptcy gives you the chance to start over and rebuild your credit.
“Bankruptcy is a process created to give consumers the opportunity to repay or eliminate debts,” says DoanLaw.com.
Although a bankruptcy stays on your credit report for up to 10 years, it only takes about two or three years to repair the damage of filing. Therefore, you might be able to buy a house or car within 36 months of your discharge, and qualify for a competitive interest rate. However, to benefit the most from bankruptcy, you’ll need to make smarter choices in the future. For example, use cash and only pull out a credit card if you pay balances in full each month; always pay your bills on time; and exercise self-control to avoid overspending.
Getting a handle on your credit and debt takes time and patience, but you can achieve an A+ score. And with this score, you’re in a better position to get lower interest rates and easy approvals.