Bad credit sucks.  Bigtime.  Bad credit makes you pay more for stuff, or maybe not even get that stuff at all!  If you’re one of the millions of people who’ve run their credit into the ground, now is the time to take stock of your situation and find a way out.  It’s not easy and will take some time, but with a little work you can be well on your way to getting your good name back.

First, make sure you check out past postings on Establishing Credit and Credit 101. Some of the info may be stuff you already know, but it’s best we begin on the same page.

Next, you have to acknowledge that unless you’ve had some major events happen that contributed to your credit problem, you probably have some issues with managing your money and planning for the future.  I’ll deal with this more in future articles, but understand that you must get the financial part of your business plan in order before you can make any long term progress with your credit.  As Dr. Phil is so fond of saying, “You don’t fix money problems with more money.”  You must make a change of habit.

Assuming you’ve got your cash flow more under control and are meeting your operating/living expenses, you can start to look at rebuilding your credit.  First you need to hit up www.annualcreditreport.com if you haven’t already and get a copy of your credit report so we can see what you need to fix.  If you’ve recently done this and aren’t eligible for another free one for awhile, you may be entitled to a second free report.  If someone runs your credit and refuses you credit, you are entitled to a copy of the report that generated the refusal as well as an explanation of the denial. 

Take a look at all the trade-lines and identify the problems.  Any revolving accounts that don’t say “Paid as agreed” are probably causing you issues.  Check the dates on these accounts.  Check the numbers.  Make sure they’re actually yours!  Credit bureaus aren’t known for their accuracy or attention to detail. 

Start by bring past due accounts up to date and start making at least your minimum payment on time.  If you can’t afford your minimum payments, then there are other options that I’ll deal with in a future article.  But, assuming you can pay them, start doing it.  Credit reports only keep 2 years of payment data, and your score affected more by recent data than older. 

For example, lets assume that 90 days of missed payments dings your score by 50 pts(this number is completely made up).  If you bring your account up to date and start paying on time, those 3 months of missed payments will stay visible for 2 years; however, while they may ding your score by 50 pts right now, it may only be 40 pts in a few months, 20 pts in one year and less after that until it hits zero. 

If you have student loans in default, you need to kick yourself in the head for being an idiot.  Student loans are the most flexible forms of credit you’ll ever have and lenders are always willing to work something out if you’re having trouble paying.  The only dumb thing you can do is just ignore the problem, because student loans are also the toughest creditors you’ll ever have.  They will find you and they WILL get their money.  If Osama bin Laden had defaulted on his student loans, Sallie Mae would have found him by now and been calling his cave weekly. 

Once you start making timely payments again, you need to consider your debt-credit ratio.  If you are using over 50% of your available credit, your score is likely taking a hit because of it.  If you’re using 70% or more, it’s taking a serious hit.  Obviously paying off your balances is the simplest way to do this, but you can also do so by opening up more available credit. 

Once you’re paying on time, your credit will start to improve.  After 6 months of on time payments, you might be able to get a new credit card or two, which will change your debt-credit ratio.  Don’t be stupid and run up charges on these suckers! This is just a nice way to game the system and increase your score quickly.

If you have more serious blights on your record, such as collections, charge-offs, bankruptcies, etc., rebuilding your credit gets more difficult, but not impossible.  These marks stay on your report for 7 years(10 for bankruptcy), but like the payment history, affect your score less and less the further you get from the date of default. 

These more severe issues deserve more extensive treatment in their own articles, but briefly, collections and charge-offs can be dealt with a number of ways.  The best is to write a letter explaining your situation and asking if you can work out an arrangement where if you pay in full or some amount you both agree upon, will they agree to remove the negative mark from your credit report.  They CAN do this, but whether or not they WILL is entirely arbitrary.  Collectors, while bottom-feeders, will often be more amenable to this sort of thing since they operate either by buying bad debt from lenders for pennies on the dollar, or by getting a percentage of what they can collect.  Either way, if you don’t pay, they make zilch.  As such, they’ll probably be willing to deal, but GET IT IN WRITING.  If it isn’t in writing, IT DIDN’T HAPPEN.  Don’t be one of the millions who whine about a collection agency that lied to them on the phone.  If the people who work for collectors were honest, good, intelligent people, they’d have gotten a better job!

Well, thus concludes part ONE of dealing with bad credit.  Not very artistic or poetic, but nobody ever wrote a sonnet to crappy credit.  Oh how I love thee; Let me count the pays!