Whether it's a foreclosure on a home, losing a job, outstanding medical bills or a business that didn't work out, sometimes our credit takes a nosedive because life happens.
Sometimes it doesn't even need to be a major life event in order for your credit to tank. Sometimes it's simply a matter of not having known how to use credit properly and ending up in some hot water as a result.
The good news is credit scores do eventually go back up. This isn't a forever thing. However, you need to know what to do in order to make sure your bad credit is just a temporary setback instead of a lifelong prison sentence.
First: Understand how credit scores actually work.
The first step in rebuilding your credit after you've taken a hit is to understand how credit scores actually work. By understanding your credit score and how it's calculated, you have a better chance of understanding how to rebuild it.
Here's a breakdown courtesy of FICO:
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- Payment history (35 percent)
- Current debt (30 percent)
- Duration as a consumer (15 percent)
- New credit (10 percent)
- Existing credit (10 percent)
This can give you a road map on how to rebuild. For example, if you're rebuilding the old-fashioned way, you'll now understand to pay down as much as your debt as quickly as you can. That will help the current debt factor which makes up a big part of your score.
Take out credit.
I know this sounds crazy. Hear me out.
In order to improve your credit score, you have to actually use credit. Note, this does not mean going into debt and staying there. It means using credit wisely.
For example, maybe you can still qualify for a new credit card so you take one out, use it and pay it off in full each month.
If you're score is really shot and you can't even get your hands on a credit card, try a secured credit card first. This would require you to put down a security deposit so you can qualify.
Just note that you should find a secured card that doesn't come with a boat load of fees. You'll also want to make sure it's reported as "unsecured" to the three main credit bureaus. Extra points if the card allows you to apply to an unsecured version without having to cancel your account.
Find a side job.
If your credit is taking a nosedive because you owe a lot of money, then it may be in your best interest to find extra sources of income so you can pay down your debt much faster.
There is no shortage of opportunity for making extra money these days. From freelancing online to driving for Uber, anyone who wants to make extra money can.
Depending on how bad your situation is you may need to consider bankruptcy or credit counseling. While we didn't cover these two topics in this article, if you feel like your situation cannot be helped with the tips mentioned above, please reach out to an attorney or reputable credit counselors to get their two cents.
Pay off your debts
Paying back the money you owe will decrease your debt (obviously), increase the amount of credit available to you, and create a positive history over time. It's the slowest way to do it, but you've got to do it.