Erica Holden

 

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5 Steps to Credit Score Stardom

It could happen to anyone. Life’s challenges in paying bills and obtaining the things we want and need can lead to poor credit management, and before you know it, your score is a little too low to allow you to get that car loan you need, or at least results in a huge interest rate. Nobody wants to throw their money away at high interest rates, and although you may be prepared to responsibly handle a loan, the mistakes of the past can all too easily haunt you in credit scores.

The reality of the situation is that credit scores don’t change instantly. Those offers to immediately fix your credit score are inevitably ineffective, or at best illegal. While it can be attractive to look for a credit counselor, this can incur surprisingly high costs that actually put you further into debt before you can get ahead. Some also recommend consolidating loans, but if you aren’t carefully the benefits in a lower interest rate are completely over-run by the credit score increase you could experience. There’s a fear that we have to be accounting geniuses to manage credit ratings, and many so called advisors are happy to offer advice and resources at a premium. However, you must not become so overwhelmed by a credit score that you buy into that too-good-to-be-true offer. This is simply not the time to throw even more money away on daydreams rather than facing reality, so let’s get serious. Rebuilding credit takes time, but it’s easy, and anyone can do it. Here’s how.

1. Freeze your current credit cards. Although you may wonder if this is fancy credit jargon, I am literally suggesting you freeze your credit card. Place it in a zippered freezer bag, throw it in a jar, and fill the jar partway up with water (not all the way, obviously, or the jar could blow when the water freezes and becomes too dense for the jar). Toss the jar in the freezer. Hopefully you can make some room, even if you have to pull out the frozen peas for dinner tonight.

   It may feel silly at first, but by literally freezing your existing credit card, you will be forced to consider purchases more carefully. You can take the jar out and thaw your card for emergencies, but you can’t mindlessly pull it from your wallet to swipe while at the department store. If you were to cut it, you wouldn’t have it available when your cupboards are bare the day before you get paid. By making your card inaccessible, you add a little time and forethought to using it later.

2. Talk to your lender. Don’t be locked into the belief that your credit card issuer is the bad guy, just because you’re having a hard time making payments. Those who offer you loans inevitably want them paid off, and many are willing to work with you to find a repayment method that meets your needs. They can often be convinced to re-tool your payments so they are small enough that you can meet them, even if it means you pay for longer. In fact, for them that’s a very nice idea, since they can get more interest in the end. While it’s never nice to pay extra interest, when you’re drowning in debt, you need to be honest about the payments you can make. You will get nowhere if your higher payment that is meant to let you pay it off in 5 years can’t be paid off in 10 because you’re missing the installments.

   Student loan providers may be required by government regulations to negotiate whatever payment plan you can handle. Even if you’re not dealing with student loans, banks and credit card companies will appreciate your honesty, respect how responsible you’re being as you honestly evaluate how much you can pay, and often be willing to meet you somewhere in the middle.

3. While you’re talking to your credit card company, consider your interest rates. Although credit card companies may not advertise their low-rate cards as well as they advertise their Platinum and Rewards cards, you can often easily switch over to that low interest. If you are a current customer, most issuers will be happy to keep you as a customer, even if it means you switch your interest rate down. In doing so, you can decrease your interest from 25% to a much more reasonable rate. For example, many low-rate cards are available at 12% if you ask. This way even if you keep up with whatever payment you’re doing now, you’ll know more of your money is paying down the principal. Your credit card will get paid off faster, your ratio of used credit to available credit will lower, and ultimately your credit rating will climb accordingly.

4. Avoid applying for new credit, and be careful about consolidating too. Consolidating loans can be a great help when you are overwhelmed by your payment plan. Though it’s tempting to pay someone else to consolidate your loans, you can often negotiate with an existing lender to do it yourself. If you go in and speak to a representative honestly about your situation, and present a clear payment plan you can manage, it can be easy to get a loan that will pay off your current debt and allow you to make one single payment per month with one interest rate. Quite frankly, not having your head spun by all the different interest rates can help you feel more controlled about getting debt taken care of.

   That said, it may seem redundant for me to suggest avoiding applications for new credit yet considering consolidation. Even if you qualify for yet another loan, you can’t let yourself see that as a free ticket either, or you will sink yourself even further. This is your "in case of emergency, break the glass" option. You need to make this choice with a solid plan to use it only to pay off current debt and get things under control. Also know that opening another credit account can increase your credit rating temporarily. Consolidating can be a last resort when you just can’t manage other options.

5. Wait. As mentioned above, improving your credit rating is a matter of time. Don’t let yourself become discouraged, and don’t waste money on “instant” offers that will be completely bogus. You can manage it yourself, but you need to constrain current spending and make the most of your installment payments. All the strategy in the world won’t get you there if you aren’t willing to keep it slow and steady, careful and refined. But when you do, you are certain to get that credit rating back to Fine, Better, and Best.