Just about everyone will need to take out a few loans throughout the course of their life. Some debt can actually help you. A mortgage or a car loan and a couple of credit cards paid on time builds up your credit score. However, when you take on too much debt it can have the opposite effect and actually work against you and end up costing you more money.
Negative Reaction to a Low Credit Score
Traditional banks make money by lending to people and businesses that present the lowest risk. When your credit score falls below a desirable level, getting a loan for your home can cost you much more or even make it impossible to find a lender willing to fund you. A low credit score also means that you will have to pay deposits on things like utilities when moving into an apartment or a home and pay a higher interest rate for a car loan. If that’s not enough, today your credit score can even prevent you from acquiring the best insurance or getting a job.
Rebuilding Your Score
Luckily, if you have a low credit score, you can improve it. The three reporting agencies derive your credit score through a number of factors including your income, debt-to-income ratio and payment history. The best way to start improving your score is to focus on the now. From this point on, make all your payments on time. If you don’t take in enough money to make this possible then you need to bring in extra money. You can achieve this by taking on a part-time job, borrowing money from a family member or taking out a personal loan to catch up on late payments. Thankfully, there are loan alternatives for bad credit. Even if your local bank won’t approve a loan, other lenders might.
Reducing Your Debt
When you have a lot of debt, you end up in the paycheck-to-paycheck rut. This can cause you a lot of added stress, especially if an unexpected expense comes along. The best way to start to free up money is to reduce your debt. The good news is there are several ways to accomplish it. First, contact credit card companies and express that you are going through financial difficulties and then ask if you can lower your interest rate. You can also do the same with a car loan or a personal loan. If they are not able to lower the interest rate then another approach is to apply for a new credit card with the option of a balance transfer and then transfer the monies for your existing card to the new one. This way every penny you pay goes directly towards paying off the balance.
Getting into debt is easier than you might imagine. It’s important going forward to stick to a budget. pay your bills on time, keep track of your spending, and monitor your credit report annually. This way when you apply for a loan, you’ll know that you have a good score and bargaining power.