If you have missed a few payments over the past 12 months, now may be the perfect time to begin repairing bad credit. Like most people, having a good credit score is important. Not only does it help me sleep better at night, it will also allow me to borrow money at a much lower interest rate. Since I am kicking around the idea of starting my own business, having access to cheap capital is even more crucial.
When someone has a good credit score, it shows lenders that they are financial responsible; a good risk so-to-speak. It tells them that you can handle the responsibility of debt. If you current credit rating is not where you want it to be, there are a few steps that you can do to begin repairing your bad credit rating. Here are a few simple things you can do that will positively impact your FICO score rather quickly.
Repairing Bad Credit 101
Start Paying Your Bills on Time Every Month
You would think that paying your bills on time each month would be obvious yet so many people fail to do even this. Once you miss a payment or two it is pretty easy to convince yourself that being late does not really matter. To be perfectly honest with you, however, it does.
When you charge something on your credit card, you agree to pay the minimum monthly charge, which includes a ridiculous amount of interest, by the due date each month. Don’t believe me? Pull out your credit card statement and check for yourself. You did read it, right? If not, you will definitely want to pour yourself a strong cup of coffee and read all about your ‘rights’.
As such, the right thing to do is to repay your obligations in the manner in which you agreed. This, obviously, starts with making a payment each month. Once you get into that habit, it becomes much easier; almost addictive actually.
Reduce Your Outstanding Debt
Now that you have begun making monthly payments to all of your creditors, it is time to start attacking these balances like there is no tomorrow. Some financial experts recommend paying down the balances that have the highest related interest rates; others recommend paying off the smaller balances first to help you gain a bit of financial momentum a la Dave Ramsey.
Regardless of which philosophy you subscribe to, reducing your debt serves two basic purposes. The first, and most important, purpose is to free up cash each month. After you have knocked out a credit or two you will be pleasantly surprised to find that your month does not run out of money as fast as it used to.
The second, and less obvious, purpose to paying down your outstanding debt is that you will have more available credit; which can actually help you build a good credit rating. I like to keep my revolving balance at less than 4% of my overall credit limit. Additionally, once I pay off a credit card completely, I do not cancel it unless it has an annual fee; then I drop that card like a bad habit.
Create New Credit Habits
The problem with repairing bad credit is that unless you change your underlying spending habits you will quickly return to your previous levels of bad credit. How many times have you heard about people winning the lottery only to be broke a few years later? If your financial knowledge does not improve, no amount of money will ever be enough to keep you afloat.
A good rule of thumb is that if you cannot afford to pay off the bill at the end of the month, you should not buy it. Making the minimum payments is no longer good enough. You need to grow up and start living within your means.
Despite the fact that these 3 tips are rather simple, they represent an easy way to get started repairing bad credit. Take each day as it comes and work on making incremental improvements. Before you know if, you will have a credit score worth smiling about.