How to Bounce Back from Bad Credit and Feel Financially Stable

Budget setbacks can happen to anyone — unplanned bills, expensive car repairs or even the loss of a job — but they can also lead to other issues, like financial instability and bad credit.

Improving a poor credit score may not be as pressing as buying groceries, getting to work or paying bills, but good credit can help you save money in more ways than one. Read this guide to bounce back from bad credit and feel more financially secure.

Why Credit Scores are Important

Even though you may not think about your credit score every day or check it as often as your bank account, it’s an important financial measurement that reflects your creditworthiness, or payment history. Although financial data is used to calculate credit scores, creditworthiness is often used in other situations, like applying for a job, leasing an apartment or purchasing a home.

Here’s What Information Is Used to Calculate Your Credit Score

Credit bureaus use the following financial data to calculate a credit score:

Payment history: Your payment history, or whether you’ve paid past creditors on time, makes up 35 percent of your credit score.
Utilization ratio: This refers to your amount owed, or your revolving credit balance compared to your limit. Utilization ratio makes up 30 percent of your score.
Length of credit history: The amount of time you’ve been using credit makes up 10 percent of your score.
New credit: This area makes up 10 percent of a credit score. Hard credit inquiries occur when you apply for a new line of credit, and they can temporarily affect your score.
Type of credit: The kinds of credit that you use can impact your score up to 10 percent.

Steps to Raise Your Credit and Feel More Financially Secure

1. Trim Your Budget

Budgets are essentials tool to help plan, track and save money; if you don’t currently follow a budget, take the time to work out a financial plan that you can truly afford. Effective budgeting should also help you work towards your savings goals and provide a cushion for unplanned bills.

If possible, trimming your budget even further can help you save more each month:

Are you living within your means? Take this quiz to check in on your financial lifestyle.
Look for ways to lower your bills: Read this guide to learn how to negotiate a lower credit card interest rate.
Stay home to save money: Working out at home or cooking your own meals can help you save hundreds or even thousands of dollars per year.

2. Pay Down Debt

If you have debt, eliminating or lowering your balance can free up money in your budget and help you save money on interest and fees. While it may take a while to pay off debt completely, making regular, on-time payments and lowering your credit utilization ratio are the most effective ways to raise your credit score. Use this guide to help prioritize your bills and find a repayment strategy that works for your situation.

3. Develop a Financial Cushion

Do you have a reliable way to pay for unplanned expenses? Do you have a backup plan in case your savings fund isn’t enough for emergency bills? Your emergency plan should include backup funding options beyond a savings or checking account.

Work on your emergency savings fund: Ideally, a rainy-day fund should be easy to access and sufficient enough to cover any unplanned bills that come your way. If your fund is low, aim to increase your savings rate, even if it’s just a few dollars per month.
Secure a personal line of credit or credit card: Apply for another form of personal credit to use in case of emergencies.

4. Monitor Your Progress

Change won’t happen overnight, but consistency is key when it comes to raising your score and improving your overall financial situation. Stay on top of your finances with these tips:

Use apps and trackers to get more hands-on: Keep an eye on your credit score, bills, accounts and more with free and low-cost finance apps.
Celebrate your success: Take the time to recognize yourself for achieving small victories, like reaching a savings goals or raising your credit score. Make sure to find room in your budget for your reward!

The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.

About Bonnie

Bonnie is a Chicago transplant who's committed to seeing the world on a dime. As an avid news junkie with an affinity for finance, she loves to help others do more with less.

← Previous