Bad credit is not a situation anyone wants to be in. It can severely hinder chances at an auto loan, house loan, insurance rates, and in some cases, employment. Credit scores are monitored by seemingly every institution in every facet of life. What are the reasons people have bad credit, and what can be done to repair bad credit?
Repairing your credit is important. It is key to starting off on the right foot. Here are 5 common reasons people have bad credit:
- Late Payments- People often do not understand the impact late payments have on their credit score. It’s a mistake that can be easily managed. Simply call the credit card company and explain the payment will be late. They will most often offer an extension or some other plan to avoid a disruption in standing.
- Defaulting- Refusing to pay credit card bills is like taking late payments and throwing it in the fast lane. It is assured a person will have a negative credit score if they default on their payments. Here is the remedy: Pay the bill. If a person cannot afford the payment, contact the credit card company. They are more than willing to help the person because it costs them money to go through the process of charging off the account.
- Charge Off- When the account cannot be collected on, the credit card company will simply charge the account off. It goes then to a collection agency, and the person’s credit score tanks. The answer to this? Contact the credit card company. Work out a repayment plan. Avoid getting the account charged off.
- Collection Accounts- If a person has one or more of these, chances are they are receiving a ton of calls from collection agencies and their credit score is damaged. There are often times a person can work with the collection agency and cure the default with a reduced payment, avoiding credit reporting.
- Loan Default- Not a good idea. An institution has loaned a person money, trusting they will pay it back (with interest). If a person does not fulfill their obligation, it’s similar to failing on a contract. The simple answer if a person cannot pay back the loan is to work with the lending institution. Can the loan be refinanced for a longer, extended term resulting in lower payments? There are options beyond the worst decision which is to ignore the loan payment.
Repairing your credit takes a few important steps. The first is to realize and understand what your score means. There is a huge difference between a score of 500 and 600, and an even bigger difference between 600 and 720 (near perfect credit). Once you have the knowledge on credit, you can educate yourself about the factors that impact your credit score. Once you know these things, you can work toward repairing your credit.
Here’s a list of ways you can repair your credit:
Pay On Time- Be sure to set reminders on credit card payments and pay them on time
Make Incremental Payments- If you owe $45 a month, try sending $30 every two weeks
This will not only get the debt paid up faster, but it will decrease your credit usage which positively effects your credit score
Monitor Spending- It is tempting to use credit cards, but think about this. That slice of pizza you may have used a credit card for… you will be paying for it over the course of several months plus interest.