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The following is a Guest Post by Beau Peters
Bad credit is one of those things that can dog you all your life. A few mistakes at a young age — overspending on credit cards or missing a few car payments — can cost you in the long run. It can take actual decades to repair the damage and experience the financial benefits of a good credit score.
With a bad score, suddenly the idea of taking out student loans or buying a house can become much more daunting. Interest rates are through the roof and the idea of paying back a loan on top of that is almost unrealistic.
Fortunately, bad credit is reversible over time. There is plenty of financial advice out there and concrete steps you can take to improve your credit and get you on your way to better financial health. Taking advantage of these resources is one of the best ways to get started.
Why Does Credit Matter?
Though we never really talk about it and honestly hardly ever think about it, everyone has a credit score. This score is used to rank the likelihood that you will have the ability and follow-through to pay back loans that you take out. It is essentially an assessment of how trustworthy you are if a bank or other creditor were to back you in your attempts to buy something large like a car or a house.
With good credit, most lenders will be happy to give you a loan for just about any reasonable thing you want because they trust you’ll pay them back promptly. Even better is that good credit can earn you all sorts of perks such as a lower overall interest rate, which means that you’ll pay less money over the course of the loan payments. This is because the lender isn’t as worried about the risk of not recouping their investment.
Bad credit, on the other hand, can have the opposite effect. Investors are more worried that you won’t pay back what they loan you, so they may offer you a loan with a high interest rate, require that you have a co-signer on the loan, or flat out deny you a loan at all. Borrowing money and actually getting ahead can be incredibly challenging in this situation, even if you’ve changed your ways and are trying to improve.
Fixing Your Credit
If you have bad credit, it should be a top priority to work on repairing your score. In general, a bad credit score is anything below 630. Fortunately, there are numerous ways to tell if you have bad credit — you are entitled to a free credit report if you are denied a loan for any reason. This is in addition to the one free report you are guaranteed every year.
The biggest step to take towards fixing your credit score is to pay your bills on time. Nearly 35% of your scorecard is determined by your ability to pay bills in full on time; after all, if you aren’t going to pay on time, can a lender really trust you? If you are a forgetful person, it can help to set up automatic payments. Even something like electricity can be set up based on a set amount each month or based on how much you actually use.
Beyond just paying bills on time, there are a handful of other things you can do to rebuild your credit. These include adjustments such as:
- Getting a trusted co-signer on important loans
- Reducing the amount of debt on your credit cards
- Get a prepaid credit card or secured loan
- Avoid opening multiple new credit accounts
- Consider leaving open paid off accounts to accrue positive credit
- Try getting financial advice from a financial counselor
- Look into companies that provide financial education and money management advice.
Building and Maintaining Good Credit
Building and maintaining good credit is challenging and, once you have it, isn’t something you want to lose. As previously mentioned, good credit can be the key to getting loans with lower interest rates and starting to get ahead on financial goals. Many of the steps to maintaining credit are similar to the ones that helped you fix your bad credit:
- Keep paying bills on time
- Leave open credit accounts that you don’t use – they are building credit for you every month
- Try to avoid having debt on your credit card for longer than it has to be there
In these difficult economic times, even these steps can be hard to accomplish. If you are finding yourself struggling to make payments on your bills because of a lost job, reduced hours, or pandemic-related issues (among other potential reasons), the best thing you can do for yourself is be proactive about it. You are not alone in these struggles.
Call your lenders including banks and mortgage companies and let them know there is a problem before things get really bad. Many are working with customers to help them through the pandemic and you might be able to work something out that will help you maintain good relations with your lender and not damage your credit.
Credit is one of the most underrated metrics in most of our lives. Good credit can help you achieve your goals, while bad credit can make life far more difficult than it has to be. Fixing your credit is a slow process, but can be done by paying bills on time, paying down debts, and showing financial responsibility. Once you have good credit, strive to maintain it; even in the economic downturn caused by the pandemic, there are ways to get help.