If you’re struggling to get by, you likely feel the pinch in your monthly budget. However, there’s something else that could be taking a hit: your credit.
This component of your finances might not be at the forefront of your mind if you’re trying to make ends meet. But bad credit could affect your ability to improve your financial situation. A low credit score can force you to pay higher interest rates — making it more expensive for you to borrow. Or it might prevent you from getting credit at all. And some employers check credit reports, which could affect your ability to land a job.
There are numerous ways to improve your credit score, but some of the most common strategies can prove difficult if there’s little spare cash in your budget to aggressively tackle debt. Here are some expert tips for how to fix your credit on a limited income.
Get a Secured Credit Card To Build Credit
You have to have credit to build credit — which can be hard if your income is low or you’re unemployed and lenders aren’t willing to take a chance on you. If you’re in this situation, you should get a secured credit card to build credit, said Becky House, education and communications director at American Financial Solutions, a credit counseling agency.
Banks and credit unions offer secured credit cards, which act like traditional credit cards but require a deposit that acts as your line of credit, House said.
“For someone with limited income, this is a very good option,” she said. “If they can save for the deposit for a few months and then open the card, in as little as nine months, they can establish a credit score or add enough positive information to increase their score.”
She recommended using the card to pay for things already in your budget, such as transportation costs or utilities. “That way, you know you have the cash to pay the card off in full each month,” House said.
House said that she had a low-income credit counseling client who applied to buy a home and was turned down due to his credit score. To achieve credit repair, he opened a secured credit card at a local credit union, used it for four months and then reapplied for the mortgage.
“He qualified,” House said. “It really does work if you use the card responsibly.”
Become an Authorized User on Someone’s Account
Another way to build credit history and improve your credit score is to become an authorized user on someone’s credit card, House said. The key is to find someone with good credit who is willing to help you out in this way. They don’t have to give you the card — just add your name as an authorized user. The activity on the card will be added to your credit report, which will generate a positive credit history for you as long as the card user is responsible, House said.
“Of course, there is the chance that the person who authorizes you on the card might fall behind or use more than 25% to 30% of their available credit limit,” House said. “In that situation, being an authorized user could cause damage to your credit. You have to pay attention.”
Get Creative About Coming Up With Cash for Debt Payments
One of the best ways to improve your credit score is to pay down your debt because 30% of your score is based on the amount you owe, according to myFICO, the consumer division of credit-scoring agency FICO. However, if you can barely make minimum monthly debt payments, you might be wondering how to improve your credit score with this tactic. There are plenty of opportunities to earn extra income with side jobs so you have more cash for debt repayment. But this option isn’t for everyone.
“You can’t keep adding work hours if you have a family,” said Bruce McClary, vice president of public relations at the National Foundation for Credit Counseling. You might have to look at creative ways to reduce your monthly spending instead.
“Everybody can look at their budget and find one thing they can live without,” he said. “It gets harder the leaner your budget is.” You don’t want to have to cut necessities, so he recommends taking advantage of community resources that can help you. For example, your utility provider might offer income-based programs or be able to connect you with programs that will help you receive services at a more affordable level, McClary said. That could help free up cash to pay down your debt. Also, check with your local United Way for help meeting basic needs.
Reach Out to Your Lenders If You’ve Fallen Behind
Your payment history is one of the biggest factors affecting your credit score, and there are a number of strategies to help you stay on top of payments. But if your score has taken a hit because you have fallen behind on payments, reach out to your lenders to find out what your options are, House said. For example, student loan providers typically have programs to make payments more affordable and bring your account back to good standing, she said.
It’s important not to wait until you’re so far behind on payments that your debt is turned over to a collection agency. Let your creditors know about your circumstances as soon as you have trouble making payments. And show your willingness to work with the creditor to get your account in good standing.
“Be very open about your situation,” McClary said.
Don’t Avoid Debt Collectors
When you have debt in collections, it can have a big impact on your credit report and score. “Just a single missed payment can cause a 100- to 300-point drop in score,” McClary said. “If you have several missed payments, (the debt) goes to a collection agency. At that point, you’re dealing with twisted metal and burnt rubble. You’re not dealing with a situation that can be fixed with a Band-Aid.”
The worst thing you can do in that situation, though, is avoid debt collectors. If you do, they’re likely to assume the worst, said McClary, who was a debt collector.
“They might be less likely to be cooperative if they think you’ve been avoiding them,” he said. “It’s never good to play hide-and-seek with a debt collector. The further along you let things go, the fewer solutions there are.”
Respond to calls or letters immediately to explore your payment options, as debt collectors are more willing to be flexible if you respond quickly. Then you can get on the path to repairing your credit.
Get Help From a Nonprofit Credit Counselor
You might need the help of a professional to fix your credit. Fortunately, you can get free or low-cost help from a National Foundation for Credit Counseling-certified counselor, which you can find on the NFCC’s website.
A nonprofit credit counselor will walk you through your budget and help you figure out your options to tackle debt and improve your credit, McClary said. Counselors also work with creditors to help get interest and fees reduced on your debt. They can even help if you have debt in collections.
“There’s a lot that can be accomplished by sitting down and talking to a nonprofit credit counselor,” he said.
For example, McClary said he’s seen people who’ve paid off $10,000 or more in debt in four years or less with the help of credit counselors. On their own, it would’ve taken much longer, he said.
Avoid Debt Repair Options That Promise Quick Results
No matter how dire your situation might seem, you shouldn’t rush to accept an option that promises quick results.
“To think you can call up somebody, fill out a form and the next day your credit will be back to normal… you’re setting yourself up for disappointment,” McClary said.
Debt settlement companies might offer to help you settle your debt for less than you owe. However, these programs often ask you to stop making payments to creditors and deposit money into an escrow account each month until there’s enough to pay the settlement amount, according to the Federal Trade Commission. This tactic is more likely to hurt than help your credit, because your bills aren’t being paid and late fees are accruing.
Other options, such as payday loans, aren’t any better. “Going into debt to get out of debt is not a good idea,” McClary said. “If you can’t afford to repay the debt you have in front of you, what makes you think you can afford to repay the debt you’re taking on?”
Taking advantage of an offer that promises fast results will likely have a long-term negative effect on your credit. And filing for bankruptcy to deal with your debt will have a long-lasting impact on your credit. A bankruptcy will remain on your credit report for seven to 10 years, depending on the type you declare.
“The reality is it takes time to restore your credit,” McClary said.
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