If you have bad credit, I don't have to tell you how much it limits your financial freedom.
You may find you are regularly denied loans and credit cards, and in the event you do get one, the interest rate may be double or even triple the rates paid by those with excellent credit. Beyond that, bad credit can affect where you live and even where you work.
Recovering from bad credit may take time, but it's not complicated. You only need two things to start rebuilding your score: a spending plan and a secured credit card.
Start with a solid financial plan
Before you run out and get a secured credit card, you need to have a good handle on what caused your credit problems in the first place.
- Did you have a medical emergency that resulted in costly hospital and doctor bills?
- Were you laid off and unable to pay your bills?
- Did you get in over your head with credit card purchases?
Regardless of the reason for your bad credit, you'll get no judgment from me. Everyone makes mistakes and everyone has emergencies. However, now that you have been through one or the other, it is time to take steps to ensure it doesn't happen again.
If you had a medical emergency and are uninsured, it may be time to start considering your health insurance options. If it was a lay-off and you are back to work, you need to start putting money aside each week for your emergency fund in case you are out of work again in the future.
In case you are wondering how you will be able to afford health insurance or save enough for an emergency fund, the answer is a solid spending plan - otherwise known as [cue dramatic music] the budget.
Having a written plan that outlines your income and how you plan to spend it is essential to escaping the bad credit trap. It can also help you avoid going on that shopping bender if you realize you're spending the rent money on overpriced mall merchandise.
Then compare secured credit cards
Once you have a firm grasp of your money situation, it is time to start rebuilding your credit. Again, this isn't hard but it can take time. In essence, you need to convince creditors that you can and will pay back any money they lend you. You do this by starting with one of the credit cards for bad credit, typically a secured card.
A secured credit card is one in which you pay a deposit to the issuing company. It's more a tool to prove your creditworthiness than a way to gain a large credit line. So, for example, you send the credit card company a $500 deposit, and they give you a card with a $500 limit. Then, if you default on your payments, the company used your deposit to pay the bill.
After a certain period of time, the credit card company may review your account and if you've been timely on your payments, they may return your deposit and transition you to an unsecured card.
When comparing secured credit cards, here are a couple points to consider:
- Annual fees: Secured credit cards typically charge one but they can vary significantly.
- Credit reporting: The whole point of having a secured card is to rebuild credit so make sure the card you choose reports to the major credit bureaus.
- Other conditions: Beware of any card that requires you to purchase certain insurance policies or attaches other strings to your account.
Finally, while secured cards are the most common credit cards for bad credit, they are not the only option. Some issuers also offer unsecured cards with low limits to those with less-than-stellar credit scores.
Bad credit can seriously cramp your financial options, but it doesn't have to last forever. A spending plan and a secured credit card are two tools to pull your credit score from the basement.