You Have Bad Credit - Now What?

Credit is a key that can unlock numerous opportunities or, unfortunately, close many doors. Having good credit simplifies many aspects of life, including securing employment, renting or buying a home, and buying a car. On the other hand, a poor credit score can limit these opportunities and result in higher costs.

The good news is that even if you find yourself in the throes of bad credit, there's a path forward. It may not be a quick or easy journey, but with dedication and the right strategies, you can improve your credit score and reclaim your financial freedom.

Consumer Credit Today

Before we discuss the steps for improvement, let's consider where we stand. According to a recent Experian study, the average FICO Score in the U.S. reached an all-time high of 716 - close to the maximum score of 800. This statistic may sound encouraging, but it doesn't tell the whole story.

Significant disparities persist across age groups and regions, with younger generations often facing more substantial credit challenges. Millennials, for instance, have an average credit score of 686, while Gen Z trails behind at 660.

These disparities underscore the importance of proactive credit management, regardless of your current situation. So, if you're one of the millions who have allowed your credit rating to suffer, here's what you need to know.

Getting Your Credit Back on Track

The first step is to review your credit reports from all three major credit bureaus – Equifax, Experian, and TransUnion. You can do this for free at AnnualCreditReport.com. Take the time to review these reports carefully, looking for any errors or discrepancies that might be unfairly dragging down your score.

Once you have a clear picture of your credit situation, it's time to roll up your sleeves and get to work. The cornerstone of good credit is timely payments. Explore automatic payments or reminders to ensure you never miss a due date.

Next, focus on your credit utilization - how much of your available credit you use - is a significant factor in your credit score. It's recommended to keep your utilization below 30% on each credit line and across all accounts collectively. Lower utilization rates suggest to creditors that you're using credit responsibly and not overextending yourself financially. For someone with a $1,000 credit limit, this means keeping your balance under $300. Reducing your credit utilization can be achieved by paying down existing balances and avoiding large new purchases on credit.

As you work on paying down debts and making timely payments, resist the temptation to close old credit accounts. The length of your credit history plays a role in your credit score, so those old accounts, even if rarely used, can be beneficial. Instead of closing them, make small purchases occasionally to keep them active.

While rebuilding your credit, be cautious about applying for new credit. Each application typically results in a hard inquiry on your credit report, which can temporarily lower your score. If you need new credit, research and only apply for products you're likely to qualify for.

Bad Credit or No Credit?

For those struggling to qualify for traditional credit cards, a secured credit card can be a valuable tool. These cards require a cash deposit that typically becomes your credit limit, reducing the issuer's risk. Use it responsibly by making small purchases and paying the balance in full each month.

Another strategy to consider, especially for younger individuals, is becoming an authorized user of a family member's credit card (assuming they have excellent credit). For example, a parent's positive payment history can help boost your credit score.

Communicating with Lenders

if you're struggling to make payments, it's essential to maintain open communication with your creditors - don't hide from them. Reach out proactively to discuss your options. Many lenders will work with you to create a manageable payment plan.

A non-profit credit counseling agency can also provide free or low-cost assistance when working with creditors.

The Takeaway

When working to improve credit, remember that patience is key. Most negative items stay on your credit report for seven years, so improving your credit score takes time. But don't let that discourage you. Every positive step you take brings you closer to your goal of better credit.

Remember, your credit score does not reflect your worth as a person. It's simply a tool you can learn to use to your advantage. Review the Financial Trouble category in the member library for more detailed information on managing credit and, if needed, don't hesitate to contact a qualified professional for personalized advice.