I used to have credit problems.
I was in debt with student loans, credit cards, hire purchases agreements and goodness knows what else.
Then, Darren and I sat down and decided we would save money and earn our way out of debt. It was a good plan.
Today, we have a great home and a wonderful life. But we were lucky!
While our credit wasn’t great, it wasn’t truly problematic when we started. We needed a little cash to get our first blog going and we put that on a card.
So, I sympathize when people tell me their credit is so bad that they don’t know what to do. So, we took a look at it and I decided to put together a guide to help you get out of immediate credit problems.
Step 1 – Find Out Where Your Credit Really Stands
If you want to fix your credit, you need to know what it’s like now. You can get a free credit score from an online service and we recommend that you do just that.
If your score is above 700, your credit is fine. You may need to pay off all that debt that you have but the lenders aren’t worried about you doing so.
If it’s less than 700. It’s time to fix that credit rating.
Step 2 – Dispute Errors On Your Credit Record
Creditors try to pretend that they never make mistakes when they leave a comment on your credit file but they do.
So, go through your credit report from each credit bureau carefully. The credit bureaus are Experian, TransUnion, and Equifax.
Check the report carefully. Is your name right? Is the date of birth correct? Is that your social security number?
If that stuff is correct, then it’s time to get into the credit side of things. Check each statement carefully against your own records. If a mistake has been made, write it down.
Then compile evidence from your own bank records to show your side of the story. Make copies and then write to the credit agency explaining what you think the truth is. Send your letter by certified mail.
The bureaus then have 30 days to respond.
Step 3 – Stop The Problems From Mounting Up
If there were no errors or dealing with the errors didn’t fix your credit, it’s time to look at how you can stop more problems from coming in.
There are three things you have to do to stop things from getting worse:
- Pay all of your bills on time, each and every time
- Pay down your debts (and if you have credit card debt – start there)
- Don’t apply for any more credit
Now, to do this, you’ll need to start budgeting – you can see my article on how to start a budget here .
Your budget must be realistic. You cannot survive on noodles for 5 years while you pay off your debts or meet your bills.
Secondly, you must always pay off the most expensive debt first. Don’t try and pay everything down at once. Pick the debt with the highest interest rate and pay that off. Pay the minimum on everything else until that one is gone. Then pick the next highest interest rate and repeat.
This is cheapest for you and will do the most for repairing your credit rating.
Note: Feel free to cut up a credit card once it’s paid off but DON’T close your account. The more available credit you have, the better your credit score.
The Good News: For a lot of people a budget and a 1-2 year plan can quickly clean up their credit but for some people – there will simply be too much debt to make this work.
Step 4 – If You Can’t Make A Budget That Works, Seek Immediate Help
If you can’t pay back your debts, you can’t pay them back. However, if you don’t take action regarding your debts – they’re going to keep growing. This doesn’t help you and it can make any eventual action you do take, even more painful.
You have two major options for help at this stage:
- Talk to a debt counselor. They can walk you through a ton of options to reduce your debt balance. They may encourage you to talk to creditors to come to voluntary arrangements which involve interest rate holidays or reduced payments.
- Consider debt management. This is where you enter into a voluntary agreement with all your creditors. They usually agree to accept less money (often much less) than if the debts were paid in full. In exchange, you agree to pay as much as you can back for a fixed period of 3-5 years, typically.
If these don’t work, there is an action of last resort.
Step 5 – Consider Bankruptcy
WARNING! Bankruptcy is a very serious action. It will permanently scar your credit record. However, in extreme cases – it can be the only way to get out from under your debts. If you do decide to enter bankruptcy be aware:
- Student loan debt will not be discharged via bankruptcy. That means you will still have to pay student loans even when everything else is done.
- Your credit record will be marked for bankruptcy.
- Even when bankruptcy finishes it may be years before you can get credit again.
Bankruptcy should not be undertaken lightly. You should always seek advice from a debt professional before opting for this choice.
I hope it won’t come to bankruptcy. In my experience the earlier you decide to tackle your credit problems, the easier it is to do so.
Get a free credit report. Work out your budget. Earn more money in your spare time. Save more money. Put that bad debt in your rear-view mirror forever. Darren and I did it, so can you.
If you have any questions about debt, please leave them in the comments. Alternatively, if you have any tips for getting out of debt, I’d love to hear those too.