Monday, 13 May 2013

Three ways to recover from bad credit

It's no secret that your credit score is a contributing factor to setting your insurance rates. If you are meticulous about paying bills on time and managing your debt responsibly, this is good news for you. However, sometimes, despite our best intentions, life throws curve balls at us causing our finances to go awry; we forget (or are unable) to pay our bills when they are due, and exceed our credit limits. These things do not just happen to the careless; they happen to all of us at some point or another...and there is a lot of fear around the possibility of becoming “that person.” This is understandable: these are not conditions you want to live with for the rest of your life: not only are they [destructive[ in and of themselves, but they affect other important areas of our lives too (like our insurance premiums). So how do you recover from a bad credit score, and join the ranks of low-paying “insurees?”

Apply for a secured credit card. One of the most difficult challenges a person may face in trying to build a good credit score is the chicken-and-egg type of dilemma it presents: you need to have various sources of credit in order to prove yourself, but in order to be approved for those forms of credit you typically already need to have a decent credit history (and how can you establish a good credit history without any source of credit?) One way to circumvent this is to apply for a secured credit card. These are specifically aimed at people who have bad or no credit. The way a secured credit works is that you pay a deposit, and that deposit becomes your credit limit on the card. After a set amount of time (agreed upon in your terms and conditions) that deposit will be returned, and you will have contributed to your credit score over that period.

Add the “other” type of credit: loans. The best way to demonstrate your responsibility with credit is to show that you can manage both kinds: “revolving” (credit cards) and installment” (loans). Sources of the installment type of credit include student loans, mortgages, and car payments, as well as a line of credit.

Remember that slow and steady wins the race. You may be tempted to rack up huge bills on your new credit in order to show that you're putting it to good use, but that might not be wise. Treading lightly is generally a better game plan. Here's why: your credit providers actually want to see that you don't exhaust the credit available to you. If you can keep your purchases limited to 30% of your credit limit, that would be a good way of demonstrating that. Lowering that even further to 10% would be excellent, if you're really ambitious.

The most important thing to remember is that even when things seem daunting, and finances have temporarily taken a turn for the worse, where you end up is still within your control. You don't have to accept the label of someone with bad credit; it is within your grasp to change it.


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