Your credit score is used by banks and other organizations who lend money to measure your financial health. Depending on how you manage your finances and your debts, you may notice over time that your credit fluctuates, either for the better or for the worse. If you have been struggling to manage your finances, chances are your credit has been suffering. You may be considering a debt management plan, debt settlement, or consolidation, but are unsure of how your credit will be affected by each of these. It can feel like a complicated system, but the key is to understand your choices.
We have tips on how to get credit via a separate guide, and the below focuses on improvements you can make to your credit today. We also have advice on how to get out of debt, if you've already gone too far.
Managing your debts
If you are able to manage your debt, using one of the best home equity loans or simply sorting a personal loan online, this is the method with the least negative impact on your credit. Although something like consolidation can lower your monthly payments, it may extend the length of time during which you have to make payments, so there are pros and cons to that option. You will need to weigh up how this suits your circumstances to see if it’s a good option for you.
Making minimum payments on loans and credit cards each month is an option, but this impacts both the amount you end up paying back, as well as the length of time you will spend paying off those debts.
Checking out one of the best debt settlement companies may also be worth considering, but it does rely on you stopping payments to your creditors. By default this causes you to accumulate bad credit, and your FICO score will suffer. However, it does mean you could that end up paying back less and having your debts cleared quicker than with other options.
Bankruptcy is the option that has the most significant impact on your score. Despite becoming free of your debts, the effects of bankruptcy can stay on your record for 10 years and can lower your score by several hundred points in one go. This means you may not be able to access any future credit, including credit cards and mortgages, for a long time.
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Sometimes, you will have to take on a debt repayment solution that will negatively impact your credit. If this is the case, you can work to rebuild your credit over time. You may need to up your credit score after defaulting on payments or as part of a debt settlement plan.
The good news is that it can be done. Once you have assessed your finances and made sure you can truly afford all your outgoings, it might be worth opening another line of credit. This may seem converse, but by showing lenders that you can make responsible payments, on time, is the key to rebuilding credit.
Make sure that you start with something that you can comfortably afford to pay off each month. A credit card is generally the first choice for people, who then pay off the full balance every month. In some cases, you will need to apply for a credit card that is designed specifically for rebuilding credit. When you start working towards building good credit again, you need to make sure you apply good financial practices.
When it comes to rebuilding your credit the thing to note is that you are not alone. There is a lot of information available online, from charities to large corporations, and it is there to help you manage a budget so that you stay on track with payments.
The one thing to note is that rebuilding credit takes time, so ensure you are capable of paying everything off at the end of the month for a long time. And check your credit rating monthly to make sure that all the information is accurate. Remember, your credit may improve more quickly if you have many debts that were all paid off in one lump sum before. If you only had a few debts, it could take longer, as financial institutions like a good history of how to use your money.