There are several ways to build better credit from scratch, but what if you are already in over your head? Bad credit is a fact of life for thousands of people. Every year, the same consumers forgo lower interest rates, better bargains, and even employment opportunities simply because their credit doesn’t measure up. If this sounds familiar, the time to fix credit mistakes is now. Begin by establishing the good habits below. Changing your everyday practices could lead to an easier lifestyle.
- Create a payment schedule. Credit card debt can do long-term damage to your credit score, especially if you have fallen prey to the traps of making minimum payments. Avoid compounding interest by creating a realistic payment schedule. Review a copy of your last bill, making note of your latest balance and the accruing interest. How much should you pay each month to attack the principal amount and the interest? Consider the following example:
Alana’s credit card balance just topped $4,000. After years of struggling with bad credit, she has decided to pay off the card within one year. Although her creditor only requires her to make a minimum payment of $135 per month, she knows it isn’t enough to combat the 17 percent interest rate. After some calculations, she determines that a payment of $365 per month will help her become debt-free and improve her credit scores as well.
Take Alana’s route and set some payment goals. Find a credit card calculator online and determine how much you can afford to pay and how long it will take to erase past debts. The path to fix credit may be a lengthy one, but you have to start somewhere.
- Know your limits. Those with good credit understand the importance of careful planning. Knowing your credit card limits is an important factor that determines your credit utilization ratio, or the amount of money owed vs. your total credit limit. Keep this number below 25 percent by creating an easy-to-understand reference guide. Create a spreadsheet that includes the following:
- The name of each credit card
- The total credit limits
- The amounts owed
- The current utilization ratios
Keep this guide up-to-date with recent purchases and payments. This strategy will help you visualize how much you can spend without damaging your credit. Moreover, a silver lining looms: Paying down credit cards almost always results in improved credit scores.
- Do your research. Complacency is perhaps the most difficult habit to break. However, fixing credit issues means taking the time to invest in the future. Take a look at our webinars to learn about the five factors of credit scoring. If you are recently divorced or have filed for bankruptcy, now is the time to understand how those life changes could affect your credit. Ask us for help if you are feeling lost. The bottom line: credit repair begins change and good habits—establish yours today.