If you’re ready to rebuild your credit score, there are two ways you can get started on your journey to credit freedom and restoration. One option is to use debt consolidation, which essentially takes all of your high-interest debts and combines them into one low-interest payment. The other option is to pay off the debts with the highest interest rates first, and then continue to add new payments each month until you’ve paid off all of your debt—a strategy is known as the snowball method. So which method should you choose?
Fico Credit Scores Aren’t Perfect
The scores you see on your credit report are more than just a number. It’s an expression of your financial reputation. So, when the FICO score is lower than you expect, it can feel like a punch in the gut. After all, as Dave Ramsey says your credit score is almost like your personal net worth to a lender. When we took over with our bankruptcy client, her FICO score was a whopping 350. Ouch! At that point, the only way she could get any type of loan or credit card was by establishing herself as an applicant with collateral or a cosigner.
I know what you’re thinking – but I don’t have any collateral, my house has gone into foreclosure and I have nothing to offer to secure a loan! That might be true for some people but not for others who are willing to work hard for their credit restoration goals.
Bad Experiences Don’t Equal Bad Credit
Many people who have bad credit believe that their credit will always be the way it is now. They may think that it’s impossible to improve their credit score because they make too much money, or because they already filed for bankruptcy once in the past. Even with these assumptions, there are ways to rebuild your credit score! Here are some tips for improving your situation.
– Pay off or reduce as many of your balances as possible
– Keep all account information updated
– Opt out of preapproved mailings
– Avoid opening new accounts unnecessarily
– Try to maintain a high balance across all cards you own
– Review monthly statements carefully and take care not to miss any due dates
– Be patient! It can take up to 2 years to see significant improvement in your report. But taking steps such as paying down debt and keeping good records of payments should help increase scores gradually over time.
What Do I Need To Know?
Whether you have a good or bad credit score, your goal should be to repair it. Here are some tips for how to do so with the least amount of hassle.
1) Find out what caused your poor credit score in the first place.
2) Figure out the best path to take to bring up your credit score – typically either by paying off any outstanding debts or by letting time pass (with payments being made on time).
3) If necessary, negotiate new terms with creditors so that payments are easier for you and/or offer alternate methods of payment (in case you have trouble managing money).
4) Keep in mind that you may need professional help from financial professionals like accountants, lawyers, or finance specialists if you’re having significant difficulties with your finances. It’s important to remember that restoring your credit isn’t an overnight process. It takes time and effort on both sides, but this is one battle worth fighting.
Create A Plan
To achieve credit freedom, it is important to maintain a disciplined mindset. To simplify this process, it is best to prioritize your plan in the following order.
I) Address your bad debt first by prioritizing high-interest loans, such as store cards and personal lines of credit, before tackling student loans and mortgages. If possible, consolidate high-interest debt into a low-rate loan with the same lender so you can reduce monthly payments;
II) Stay consistent with monthly payments by setting up an automatic payment with your bank account;
III) After staying consistent for one year or more, request an increase in credit limits from both your credit card companies and lenders who offer open lines of credit.
How Long Will It Take?
No one answer will give you a definitive answer. It all depends on what caused your score to drop in the first place. If you had some accounts close or go delinquent, it could take three months to see an increase in your score. But if you were turned down for credit because of too many recent inquiries or bankruptcies, it could take up to two years to rebuild your credit to get approved again. But we’re here to help!
Problems, Problems Everywhere
There are many ways to restore your credit score, but it is important to address the underlying problems that got you into trouble. For some people with limited or no income, rebuilding their credit can be a complicated process. A series of mistakes in their personal or professional life could have led them down the path to financial ruin. One way to climb out of the debt pit is by filing for bankruptcy.
However, not all bankruptcies are the same. Depending on which chapter of bankruptcy you file for, your assets and debts will be treated differently by creditors.
Living Debt-Free Isn’t Always Easy
Living debt free isn’t always easy, but it’s worth it.
You may be living with debt because you’ve never been taught how to properly handle money. Debt can take the form of credit card balances, high-interest personal loans, or even just not having enough cash on hand for unexpected bills. It’s difficult to know where to start if you find yourself in this situation and don’t have a budget yet. Here are some tips that might help you get started living a debt-free life:
▪ Create an emergency fund – so when an emergency comes up, there will be enough savings set aside
▪ Find extra income – cutting out any unnecessary expenses is a great way to save money.
▪ Make a budget – learn how to spend your money wisely and stick to it.
▪ Pay off all your debts – pay off the lowest balance first, then work your way up.
▪ Use automatic payments – set up automatic payments from your checking account to your creditors so that they’re paid on time every month. Avoid using auto payments from a credit card since interest rates will accumulate quickly and increase the amount owed by the next due date.
▪ Start investing – invest 10% of what you make each month into something like stocks or bonds, which will grow over time and eventually be worth more than what you invested.