Bad credit, how you get in to it. And how to get out of it.

Bad credit, how you get in to it. And how to get out of it. Having bad credit has become to some a quasi mystical state that many people don’t even understand how it occurs. This is rather serious as loans are a basic part of life today. If you want to own your home, you need a loan. If you want to start a business, you will need a loan. Buy a car? Very likely you won’t have the cash to buy it outright. Of course you might be financially independent and not need of loans. But I don’t think you would be reading this article if that were the case.

So how do you get bad credit?

Simple, by not paying your debts or by being late in paying your installments. Every debt you contract, every loan you purchase is registered by a series of companies that record and provide reports on the credit history of people. From this credit history a credit score is calculated. This credit score quantifies the risk lenders take on when lending money to the borrower in question.

That is the simple answer. There are other ways to get bad credit. You can affect your credit score by applying for too many loans. Every time a company checks your credit score to decide if you are a good bet your credit drops. If you apply for many loans you will look (probably quite accurately) desperate and this will destroy your credit score.

You also affect your credit score when your credit is maxed out or very close to being at the limit. This is especially true if you apply for loans and credit cards when you are already borrowing all you can on other credit cards.

So that’s the bad news, how can I get out of bad credit?

You won´t be surprised to know that there is no easy fix but there is a way out. In fact there are many things you can do. The first step is not to do anything that will further damage your situation. It might be that even though you want  a new car or a new home you will have to wait. And waiting is one of the best ways to get out of bad credit. For instance if you have just been through a bankruptcy it is advisable to not take any loans for at least two or three years.

Another route to a better credit score is to take on credit cards that are guaranteed by an account or some other collateral. The trick is to use the credit cards regularly and pay the whole sum credited every month. A similar option is to take on a line of credit on your home equity if you are a home owner. This will have the effect of proving you are in control of your finances and can control your spending.

If you don´t own a home you can use a car title or some other collateral. These steps all have the same purpose to prove you have control over your spending and you are a trustworthy borrower.