And heck, you don’t have to be. Instead, work your way back to a better credit score.
When was the last time you checked your credit report? It’s time to start. The three major credit firms (Experian, Equifax and TransUnion) are required by federal law to provide you with one free credit report each year. Check them!
And once you do, make sure you look beyond the scores for areas to repair.
"The first thing to understand is the components that make up your credit score. Sixty-five percent of your credit score comes from just two factors: 35 percent from payment history and 30 percent from credit utilization," explains Stephen Lesavich, PhD, JD, credit card expert and co-author of The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards.
You should also monitor your credit report for things that don’t belong there. "If you find a mistake, reach out to the credit bureau to make sure that the error is taken off and corrected, and make sure that your score is up to date," says John Sun, chief credit officer of AvantCredit, an online lending platform. Services like Credit Karma will also allow you to monitor changes to your credit report (for free!).
Getting back on track isn’t just about your credit score, it’s about your whole financial life. So sit down and plan out a budget. "Put together a budget and figure out what you can realistically afford to pay each month to work down your debt. There are nonprofit organizations that can help you with this. But be wary of scams," says Coleen Pantalone, PhD, professor of finance at the D'Amore-McKim School of Business at Northeastern University in Boston.
Also, you can work your budget from the payment end, too, by working with creditors to create a monthly payment plan. "Don't wait for the debt to go into collections. Generally, creditors will work with you if you take responsibility and show that you are serious about repayment," says Pantalone.
This can’t be stressed enough. Since 35 percent of your credit score is based on your payment history, it’s absolutely essential that you pay your credit obligations on time. Even if you haven’t been diligent about this in the past, doing so going forward will benefit your credit score.
"Successfully paying installment loans, mortgage payments, car loans, etc. on time each month will all help improve your credit score," says Sun.
It seems like a no-brainer, but paying down your credit cards isn’t just important for responsible credit use, it also will help raise your credit score. Since 30 percent of your credit score is based on credit utilization (how much of your available credit you are using — less is more here), paying down debt will help boost your scores.
"Try to reduce your credit card debt by creating a budget and sticking to it. Your budget must include setting aside a portion of your money that is dedicated to paying off your credit card with the highest interest rate first. Then stop using that card," says Lesavich.
So, you’ve paid down debt and committed to a less credit-filled life. What now? Well, whatever you do, don’t close your credit accounts. Yes, you read that right. "It may seem counterintuitive, but closing an existing account can actually negatively impact your credit score. The longer you have demonstrated that you are a responsible user of credit, the better," says Sun.
While you are fixing your credit, forget about getting more credit of any kind. "Applying for more credit when your FICO score is already low can hurt your score even more. FICO's research shows that opening several credit accounts in a short period of time represents greater risk — especially for people who do not have a long credit history," says Sun.
Also, it’s important to note that your credit score won’t rebound overnight, but with a little work, it can be revived. "Bad debt can stay on your credit report for seven years, so there is no easy fix, but regular payments and getting the amount you own down to a reasonable level from the credit rater's standpoint will help you get there," says Pantalone.
You can do it.
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