| Many businesspeople have faced a credit crunch at some time in the life of their company. In a down economy, when clients are paying slow — or not at all — the entrepreneur often uses his or her own personal credit to keep the business afloat until times get better. But if the slowdown lasts longer than reserves, and impacts your credit standing, that can be a serious problem.
Restoring bad credit can seem impossible. Fortunately, it's not. Difficult? Yes. Impossible? No.
Where most people find restoring their credit most difficult is changing their spending habits. Even if you've cleared yourself of credit card debt, for instance, you're likely to tempted to use the card soon thereafter, despite knowing full well the difficulty you had in clearing yourself of that debt in the past. For those looking to restore their credit and not make the same mistakes twice, consider the following tips.
Develop a budget: This is best and most easily done by listing all debts you owe, bills you must pay each month (i.e., rent, utilities, etc.), and other monthly expenses and then comparing those monthly expenses to monthly earnings. Seeing the two next to each other can be frightening. However, it can also be eye-opening, showing just how much or how little leeway you truly have for frivolous spending each month.
Once you've seen what you owe and what you earn, you can develop a budget that fits accordingly. Make sure the budget is realistic.
Use your savings: If you have substantial savings and substantial debt, use the former to pay off as much as you can. Debts, particularly credit card debts, often carry high interest rates, much higher than the interest rates your savings will earn sitting in the bank. That means your debt will be increasing significantly each day you have it, while your savings will only witness a marginal increase sitting in your bank account.
It's best to use your savings to pay off high-interest loans or debts first. For example, if you have an unsecured bank loan with a balance of $8,000 at 11 percent, but a credit card debt of $3,000 at 30 percent. Though the bank loan debt is higher, you're better off paying off the credit card debt first, as the accrued interest on the credit card debt is actually higher (and will continue to get higher), despite the value of the bank loan being more than double the amount of the credit card debt. It's always best to pay off higher-interest loans or debts first to avoid accruing more debt.
Try to re-establish credit: Despite having bad credit, if there is a past creditor you've had a good payment history with, re-establishing that relationship can be a great first step toward restoring your credit. Such creditors are often willing to re-establish a relationship, figuring you’re worth the risk. Take advantage of that willingness if it’s there.
Read the fine print: Many people with bad credit jump at the chance to open new credit accounts, figuring it’s a great way to re-establish their credit history. Unfortunately, that’s not always the case. Companies offering “special offer” or “introductory” interest rates too good to be true should be avoided. Always read the fine print in credit agreements before signing up for a new account.
Avoid filing for bankruptcy: Some people feel as though Chapter 7 bankruptcy is a “Get Out of Jail Free Card.” In fact, it's more of a “Extend Your Stay in Jail Card.” People who file Chapter 7 will have that appear on their credit report for 10 years. Chapter 7 can wipe out your debt, but it will make it extremely difficult for you to establish a relationship with lenders down the road. |
