Utilizing credit is part and parcel of the 21st-century lifestyle. From small things like going grocery shopping, to big-ticket items like buying a house, nearly everyone leans on credit to get through life.
However, if you don’t treat your credit with respect, you may find yourself headed down a slippery slope.
Regardless of the reason, if your credit has suffered in the past and you’re struggling with the repercussions in the present, take heart! You’re not alone.
Millions of others are struggling with similar situations. As long as you keep your chin up and stay positive, it’s certainly possible to fix even the worst situations. All you need is a little thoughtfulness, self-control, and patience.
Here is a step-by-step guide to help you repair your credit and get back on the road towards a brighter future.
Assess Your Current Finances
The first thing you should do is assess your current financial situation in order to understand just how bad things are. Do you need to take extreme action or are you simply inching in the wrong direction?
One of the best indicators of your financial health is your credit score. If your score is under 629, that is going to be defined as straight-up “bad credit” in the eyes of most lenders.
If it’s 630 or higher, you may simply have a sub-par credit that needs to be improved rather than aggressively “repaired.”
Either way, the advice below should be followed, though less strictly if you’re only improving rather than repairing.
Create a Budget
Every financial advice piece includes “create a budget” for a reason: it’s ground zero for developing healthy financial habits. If you don’t have a budget, you will never be able to maintain your financial health over time.
With that said, the first thing you should do is create or update your budget.
You can do this by:
- Tallying up your income and expenses in order to ensure that your spending doesn’t outpace what you earn.
- If you are spending too much, either figure out a way to reduce your expenditures or brainstorm new forms of income.
- Begin setting aside savings to create an emergency fund and save up money for larger predictable expenses, such as a vacation or a down payment on a car.
While it’s important to be frugal as you go about repairing your credit, it’s also essential that you be reasonable in your budgeting. Remember to balance responsibility and socializing so that you can remain intentional about both.
Set Clear Values and Goals
As you cobble together your budget, you’re going to want to consider your values and long-term goals as well. For instance, while you can save money by purchasing the cheapest food, you may have a conviction about eating healthy.
Another example could be wanting to retire at sixty-five years old, which would require creating a retirement plan sooner rather than later.
As you identify your values and the goals that fit within them, begin to work them into your budget.
For example, if you want to remodel your home, determine which projects you can afford (not just what you want) to do as well as areas where you can save money to pad against any unexpected charges.
Set savings goals, define what you can and cannot spend, and figure out what items you’re willing to splurge on that won’t break your budget.
Begin Repairing Your Credit
Up until now, everything has focused on addressing your current budget, savings, and financial goals. This is because you must have a firm foundation in place before you begin to work towards fixing your credit.
Once you’re ready, you can begin addressing your bad credit in the following ways:
- Pay outstanding balances and missed payments immediately.
- Order a copy of your credit report from each of the credit bureaus and dispute any errors that you may find.
- Make all of your payments on time going forward.
- Keep paid-off credit cards open to increase your credit utilization ratio.
Small behaviors like these can quickly boost your credit score by showing that you’re being responsible with your current debts.
While these short-term fixes are a good start, you also need to set up a long-term plan as well. Most of this plan should revolve around one thing: paying off your debt while sticking to your budget.
Now, this is in reference to reasonable debts. For instance, don’t worry about paying off your mortgage first. Over 70% of American consumer debt is tied up in housing, and it’s a normal debt to retain and pay off in monthly installments.
Instead, start with things like credit cards and personal loans and then focus on larger items, such as auto and student loans.
As you create a plan, remember two things.
First, all of this will take time. If you have a missed payment, paying it is incredibly beneficial, as it will stop actively negatively affecting your score.
However, it still won’t come off of your credit report for up to seven years — and that’s okay. Time heals many wounds, even financial ones. The important thing is that you pay the debt and don’t add any new debts over that time.
The second thing is to remember that there is a large variety of credit repair agencies. While you want to do your homework when choosing one, if your situation is desperate enough, it may be worth considering taking your finances to a professional to help repair them.
Focusing on the Future
Repairing credit can be both overwhelming and exhausting. However, it’s important to remember the three virtues: thoughtfulness, self-control, and patience.
These three can help you stay focused and on track as you right the ship of your finances and set yourself up for an exciting, financially independent, amazingly bright future.
Dan Matthews is a freelance writer with a penchant for financial wisdom and solid research. You can find him on Twitter @danielmatthews0 and LinkedIn.