Bad credit and debt often go hand-in-hand. Once your credit score starts to take a dive, you usually end up paying more in interest rates—making repayment even harder. According to Badcredit.org, only 1.2% of Americans have a perfect credit score, while approximately more than 30% have poor or fair credit. But you don’t have to live with bad credit and debt forever. There are strategies and methods that can help you regain financial health.
Credit Score Factors
A poor credit score makes getting loans that much harder, from auto loans to mortgages to even renting an apartment.
What goes into a credit score?
Payment history: Your payment history is weighed heavily. So, if you’re late on a payment or miss one, your credit score can take a significant hit.
Credit utilization ratio: This is the ratio of how much credit you’re using versus how much you have available. The rule of thumb is to not go over 30% of your available credit.
Credit history: Your credit history is how long you’ve had specific lines of credit. Older credit cards give you credit longevity, so don’t throw them out.
Credit mix: It’s good to have a diverse mix of credit lines, including a mortgage, auto loan, student loan, and credit card.
New credit: Opening a new line of credit can give your score a boost, but make sure to keep your card in good standing.
Ditching Your Bad Credit Score
The tried-and-true method of handling your expenses is the budget. But sometimes getting help is the best way to tackle a situation that has become too hard to handle on your own.
Talking to a credit counselor can help you get a solid budget into place, but a debt management program (DMP) can help you start to pay down your debts in a manageable way. When you enroll in a DMP, a counselor will work with your lenders to consolidate your unsecured debt (credit cards, unsecured loans, collection accounts, etc.) into one monthly payment that’s affordable to your budget—while also helping to lower your interest rates, so you can pay off your loans in three to five years. Just enrolling in a DMP and making payments on time can boost your score.
A common misconception of debt management plans is that if you have bad credit you won’t qualify. The reality is, if you have bad credit a debt management plan can help you recover financial control and health.
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