How To Rebuild Credit: the Basic Facts
These days, if your credit score is in shambles, then so is the rest of your life. Of course, we all know pretty well that the banks will check your credit score for mortgages, and dealerships will check it for auto loans, but the rabbit whole goes even further downward.
Did you know that insurance companies would give you a higher monthly rate if your free credit report gov is an issue? Their reasoning is that you are more likely to be less responsible and pay them on time. Also, some employers will deny you a job after checking your credit score. While this may seem like a total invasion of privacy, this is the unfortunate world we live in.
So, what do you do if your credit score has been destroyed?
Save Up A Cushion
What got you hear in the first place? Usually, good people don’t find themselves into debt because they went on a shopping spree. Good people find themselves in deep because there was a crisis, a job loss, a car crash, a medical bill, or even a friend in need.
But, what do all these problems have in common? About $1,000 could have kept you afloat. What we usually do when problems come our way is to put it on the card, but it is best to save up about one grand. This way, you are not tempted to charge when there is a crisis. Keep it safe, secure, yet extremely liquid. This is your “rainy day fund”.
The Snowball Effect
The next step is to take on one payment after another. The key here is to begin to achieve motivation in the form of momentum. It was momentum that got you here, and it can be momentum that gets you out.
Your first step is to get the ball rolling by paying off the least credit card first. Did that feel good? Well, just wait.
Next, use that extra money to pay down the next largest pit of debt. This will keep the snowball in motion. Of course, while you are doing this, make sure you are making the minimums on your other debt payments. Just continue the pattern of using the extra money you save from the each item that you’ve paid off, and apply that to the next round of debt.
As you keep using this method, you will notice that the snowball becomes easier and easier to roll, until eventually gravity takes over. Before you know it, you’ve taken care of two credit cards, your car, and you are working on your student loans.
An Ounce of Prevention
There are a lot of people that say that you need credit cards to keep your credit alive, and some advisors have even directed people to get “store credit cards” to build it. Unfortunately, this is a fallacy, as credit card debt is almost always seen as toxic. If you want good debt, then get a school loan and invest in your education.
The key to digging your way out of financial disaster is going to be playing on what motivates you and preventing what draws you into problems.