If you live in North America and particularly in the US, you know what a credit score is. It is that number determined by a set of institution that indicates your credit worthiness. Whether it is a good or a bad one, that a number on a computer determines your financial eligibility to borrow. For some, it’s an asset. After reaching financial stability or through paying debt, a ‘reputation’ is established, one which could be useful later. Any mistakes you made financially in the past can have a negative effect on your ability to get a mortgage, borrow for a business or a car – and while you could be financially secure now, the situation is the opposite! The first step in the process of reaching a good credit score is in many cases paying off debt. That still means a low credit score for a little while, and if you’ve ever gone through bankruptcy, you could find it even harder to build your credit back.
In the banking and lending world which I worked in for a while, people with less than good credit score always had trouble when it came to borrow. Mistake of the past came to haunt them and unfortunately, for the worse. I believe that when you are already in debt and struggling to keep your head over the water, it is best to limit any further borrowing. In fact, I recommend avoiding it. With some counseling and planning, it is possible to establish a strategy that involves no consolidation or additional debt. Beware of those ads you see on TV or that you hear on the radio about helping you with your debt. It is a service and it comes at a cost, a cost you may not be able to digest.
Nonetheless, there are solutions in some cases that involves the option of consolidation. I’ve worked with clients in the past who used this technique to get back on their feet. It does require discipline and focus. Let’s review the following options that can help an individual with debt issues or rebuilding a credit rating.
- Guarantor Loans. With these loans, a friend, an acquaintance or family member backs your loan and agrees with the lender to cover your repayments should you be unable to. They sign on the dotted line with you and they basically are saying that they trust you to make repayments on time so that they don’t have to. Yes, as you can already imagine, this requires a high level of trust on their part and accountability on your part. You should take this very seriously as you are technically endangering the financial stability of another individual. If you are the guarantor, make sure that this is the right move for you. This option is like a collateral to a lender, because the guarantor guarantees the payment if the debtor misses it.
- Credit Union Loans. Whether you are looking to borrow for a car or for a house move, you can think about using a credit union to help. A credit union car loan can be better value over time, too, because in general, you’d pay less interest than you would have with a major bank. They can also help you to make your repayments simple and this can help you to build up a positive credit score rating.
- Credit Cards. There are lots of credit building cards out there that you could consider for your borrowing needs. While it’s never advisable to use a credit card if you don’t need one, it’s always a good idea to build your credit. Take the time to pay off your debts, and at the same time you can make small purchases and pay them off on time to show that you can be trusted to do so.
- File for Bankruptcy: Another option – although it should be your very last resort – can be to file for bankruptcy. However, you should note that it would not entirely absolve you from all loans. Nonetheless, it might clear a large chunk of your debt. Many companies like Bankruptcy Canada are ready to provide you with counsel on how to file. Be aware that when you opt for this choice, it will negatively affect your credit rating.
It’s better to work on repairing your past than fight it and be constantly stressed. I always recommended to my client a level of responsibility for what they’ve done to themselves. Then, the lesson was learned, and similar mistakes usually never happened again. Review the options mentioned in this article and evaluate which option is best for your situation. Still wondering or needing a personal plan, make sure you sign up for the money-smart budgeting course today!