You vowed that this year was going to be the year that you finally manage to kick financial butt. The only roadblock? Your debt and bad credit. When you first start trying to rebuild your finances, it feels like these two things actively work together to keep you deep in the money weeds. The most common piece of advice? “Get rid of all of your credit cards and never use them ever again!”
On the surface this seems like pretty good advice. If you don’t use your credit cards anymore, and you close out your accounts you can just pay your debt down without worrying about available credit becoming too much of a temptation. One problem with this is your credit history length is a part of your overall credit score. If you want to work on getting your credit score up, you need to pay off the debt, but keep the credit accounts open. This is especially true if you’ve had the accounts for a long time. Those weigh on your credit score.
The truth is that rebuilding your credit and financial health is just as much about how you use credit as it is about how well you abstain. After all, how can you prove that you know how to use credit responsibly if you never open a line of credit or take out a loan again? Those who are financially fit regularly use credit and loans to increase their wealth. It’s all in how you use it responsibly.
Hide Don’t Destroy
One of the best things you can do to take away the temptation of a credit card is to take it out of your wallet. Keep it someplace that is not at all handy (so you won’t be as tempted to use it when shopping online) and erase its information from all of your favorite online shopping sites. For some of you this might mean simply keeping it in a dresser drawer instead of a desk drawer. For others it might mean sealing the card inside a plastic bag and then sealing that bag inside of another larger plastic bag that you fill with water and keep frozen in your freezer.
This way you’ll pay down your debt without using your cars to re-max them out and you’ll still have credit available to use responsibly once you’ve gotten your bills under control.
Related Read: How I paid off over $50,000 in credit card debt
Financing for Bad Credit
Another option–especially for those whose credit accounts have all been closed by their creditors (or sold off to collection companies)–is to try no credit needed lending built specifically for someone who has bad or limited credit. For example, many independent retail establishments will pair with third-party financiers, like Crest Financial, who specialize in leasing for people with bad credit. These companies don’t run credit or background checks, so obtaining credit won’t be limited by a problematic credit report. However, they do report your repayment history to the credit bureaus, so this can be a great way to improve your credit when you’re ready to take on a new debt.
If you don’t have something specific that you are attempting to purchase and want to rebuild your credit in more of a passive way, the best way to do this is with a secured credit card. These are lines of credit that you open with your bank. They’re sort of like those prepaid Visa cards except that your activity is reported to the credit bureaus and if you default on the account, they keep your collateral deposit and charge you for whatever interest you might have accrued. The best way to use these cards is to every once in awhile swipe them instead of your debit card at the grocery store and then as soon as the charge posts to the account, pay it off from your checking account.
Related Read: 5 ways to increase your credit score quickly
While rebuilding your credit and learning how to use it responsibly is incredibly important for your future, it is not the only part of your financial health that deserves attention. You also have to be very honest with yourself about how you got into this predicament. Was your spending out of control or are you not earning enough to cover the bills you’ve accrued? You might know the mechanics of budget building, but do you have the discipline to follow the budget you build? It might be worth talking about this with a counselor or therapist. He or she can help you figure out not just why this predicament occurred but the steps you can take mentally and emotionally to develop the discipline and good habits needed for future financial health.
Whatever you do, don’t give up! Bad credit does not have to be forever. If you work at it, you can overcome your debt and lead a financially healthy life.
Do You Know Your Credit Score?
Even if you don’t plan on getting a loan, a good credit score can affect your ability to get a job, a place to live, and will save you money whenever you need to borrow. If you don’t know your credit score, you can get yours free at Credit Sesame. It’s 100% free with no credit card required to signup. I’ve been using it for years to monitor my credit score.