Cleaning up bad credit.

Not everyone can have a perfect credit rating. If for some reason you have fallen behind on some bills or loans, or your credit history shows a foreclosure, bankruptcy, auto repossession, or other types of bad credit, there are ways to clean up your poor credit standing. First, let’s determine if you have bad credit problems that may need some fine-tuning.

What is less-than-perfect or bad credit? Most lenders consider you a higher credit risk if your credit report suggests any of the following resulting in your ability to only apply for bad credit mortgages:

Inability to follow successful financial behavior
External events that created financial stress, such as losing your job
Lack of knowledge about financial and credit matters
An insufficient economic cushion due to a lack of savings
Or you may be determined to have bad credit if you have any of the following on your credit report:

Revolving credit (credit cards): any payments 60 days or more past due and more than two payments 30 days past due
Installment credit (auto loans): any payments 60 days or more past due and more than one payment 30 days past due
Housing debt (mortgages and rent): any payments past due.
In all categories, all late payments must be explained when applying for new credit.

Some other things associated with poor credit problems include:

Recent credit inquiries
Overextended credit
Paycheck garnishments
Liens
Bankruptcy
With all the bills you have each month, it’s difficult to keep track and make sure they are all paid on time. There are many reasons people fall into debt or establish bad credit ratings, but there is no reason to stay in debt. With dedication and patience, you can clean up your bad credit, get control of your finances and your future.

If you fear your credit rating has slipped into a bad credit range due to financial difficulties, here are some tips to help you get a fresh start and establish good credit:

Don’t ignore credit problems.
If you fall behind in payments or have difficulty meeting the necessary payment amount, talk to your lender. Many will listen and help you arrange a solution. The sooner you face it, the more lenient most lenders will be, and the sooner you can accomplish your financial dreams.

Check your credit report.
Your personal credit report reflects your financial behavior and is therefore used in the loan approval process. Get a copy of your credit report to accurately assess your current credit file. Find out if you have good or bad credit, make sure the information listed is accurate and up-to-date, and correct any errors you may find. Clean up and improve your personal credit report by adding any additional information that can enhance your stability (i.e., if you have lived or worked at the same place for a length of time) and show the ability to make payments on time. If you’ve amassed bad credit due to a unique situation, you may write a 100-word statement explaining your circumstances and send it to the credit bureaus. They will add it to your credit file.

Get credit in your own name.
Don’t let someone else’s bad credit history influence your own. If you are married and your spouse has had financial problems, be sure that you establish good credit in your name alone, but also help repair your spouse’s bad credit problems. Also, try to avoid co-signing a loan for someone else. You will be held financially responsible if the other person fails to meet his or her obligations.

Check the rates and fees that accompany your credit cards.
The rates will most likely change on variable rate cards and they might have gone up over the past year. The average interest rate is around 18%, but there are many offers with lower (and much higher) rates. Also, check if there is an annual fee or if the card’s annual fee has been raised.

It’s best for your credit rating if you pay your bill on time each month. By accruing late charges you can negatively impact your credit file and increase interest charges. Although it is tempting to use your credit cards to pay for something when you don’t have the money in your pocket, if you can’t afford it, don’t buy it, and avoid potential bad credit behaviors.

Think about getting a home equity loan if you are a homeowner and have accumulated some equity in your house. This type of loan can help you pay off all of your credit card bills as well as other personal loans such as car payments. You’ll save money because you’ll be borrowing at a lower interest rate and paying off old debt immediately. You may also find that your finances will be easier to manage because you’ll be making one payment rather than five or ten which may prevent late payments and bad credit behavior. Finally, you may realize added tax savings because the interest may be tax deductible. Consult your tax advisor about these deductions.

Pay more than the minimum.
A minimum payment is usually 2-3% of the outstanding credit card balance. Instead, pay as much as you can each month. Create a budget and stick to it. Cutting back even just a little bit will help you save hundreds, or maybe even thousands, in interest payments alone. Plus, you will get out of debt and on with your life faster.

Transfer your balances to a low-interest-rate card.
There are so many credit card offers, just be sure you read the fine print to get the best deal. Find a card with low or no annual fees, a low interest rate and a 25-day grace period. Be aware that transferring your balance to one card can get risky because the rate may rise unexpectedly. Often you’ll start with a low introductory rate, but after six months the rate will increase to the full credit card rate. Pay attention to your monthly statements and if the rate increases, shop around for a better arrangement. Finally, check with your bank first to determine if any new debts you charge will be financed at the standard credit card rate or the low introductory rate.

Obtain a secured loan.
Your bank may ask you to deposit an amount (usually between $100 to $1,000) to use as your credit limit. The bank will then issue you a credit card. The deposit assures them you will honor your debt. If you don’t, the bank will most likely confiscate your deposit. Be sure to ask about rates and potential application and processing fees, and if such fees will be refunded if your application is denied.

Avoid additional credit inquiries.
An inquiry is generated when a creditor runs a credit report for you (such as when you apply for a credit card). Inquiries typically remain on your personal credit report for two years. Therefore, by running unnecessary reports, you send out a signal that others are looking into your credit history. If a large number of inquiries occur in a short period of time, lenders may think that you either are overextending yourself by taking on more debt than you can actually pay back or are applying for more credit because of financial difficulty.

Don’t max out your credit cards.
The ratio of available credit to your total credit balance is very important. Your credit limit is based on your income, your current debt and your credit history. Be familiar with this amount and keep your spending beneath it.

Hopefully these tips can help you clean up bad credit and put you on the path to establishing a good credit rating.

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Posted by Victor, filed under Uncategorized. Date: September 30, 2008, 1:44 pm |