Getting yourself into a situation that damages your credit might seem like the end of the road, but it needn’t be. A lot of people have found themselves in the same situation, and it’s what you do about it that will determine the outcome.
Your credit score is affected by a failure to pay debts such as loans, mortgages, and credit cards. As the bills become overdue, your creditors file reports with the credit bureau, which will affect your chances of securing credit in the future.
So, if you’ve had a credit setback, what should you do?
Deal with it
Do not, whatever you do, bury your head in the sand like an ostrich and pretend it’s not happening. For every repayment that you don’t make, your credit score suffers further and will be harder to fix. It’s easier to repair a damaged credit score than it is to fix a decimated one.
Acknowledge what has happened by sitting down with your debts and collating them. Work out how far behind you are in the payments, and how long it’s going to take you to get yourself out of the hole. Have a realistic grasp of how you got here and what is needed to fix it. Sell off assets you don’t need, such as a second car, to get your debt repayments up to date.
Speak to your creditors
Most creditors are more than willing to discuss your debts and the terms of their repayments. If your financial circumstances have changed due to a loss of income, you might be able to negotiate a payment break or reduced payments over a longer period. This is something you should do before it affects your credit score.
Creditors are more likely to appreciate a show of willingness on your side to honor the debt. The renegotiated terms will help improve credit score levels and present a win-win situation. You’re under less financial pressure to pay, and the creditor is getting their money back, even if it’s taking longer than they anticipated.
The number of people getting in over their heads with debts is steadily growing, and they need help. To this end, debt counselors and consolidators have started cropping up in every town and city.
When you consolidate your debt, you take out a loan to pay off all your existing debt, and then make a single monthly repayment. It might be the best solution to your problem, offering a lower interest rate and more extended repayment period.
As you’ll then have honored your debts, this move will help improve your credit score. But bear in mind that you’re not out of the woods yet as you must keep up with the consolidated loan repayments.
Avoid future debts
Having your credit score damaged is often a very painful lesson, but you can carry what you’ve learned forward into your future decisions. Getting into debt is easy enough, but getting out of it is another matter altogether.
You’ll think twice the next time a financial institution offers you a credit card with what seems like no strings attached. There would be nothing wrong with getting the credit card provided you knowing that it’s for emergencies only and not giving in to the temptation to use it unnecessarily.
You might also weigh up the relative merits and demerits of going into debt to purchase something that you should instead save up for until you can pay cash. While debt is inevitable, it should never be your first course of action when making responsible financial decisions. Instead, going into debt should be your last resort.