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4 Credit Score Worst-Case Scenarios and How to Deal With Them

Sept. 16, 2016
Credit Score, Personal Finance
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Making a serious money mistake never feels good, and having to deal with a credit mess can be painful.

If your credit score has hit a rough patch, don’t worry: Even the worst errors can be fixed. Take a look at the four worst-case scenarios below and how to deal with them.

1. You’ve experienced a bankruptcy or a foreclosure

Losing your home to a foreclosure or going through a bankruptcy will result in a serious black mark on your credit report that will hang around for seven years (possibly longer in the case of a bankruptcy). Immediately after the event, you’ll see a sharp dip in your credit score. Consequently, it will be difficult to get credit.

This presents a challenge because your most important goal is to prove to lenders that you’ve learned from the experience and you’re a responsible borrower. However, it’s not impossible. Start by:

  • Getting a secured credit card — Choosing a secured credit card over a prepaid debit card will help repair your credit because you’re using a credit line. Since you probably won’t qualify for a traditional credit card right away, this is your best option.
  • Making all your bill payments on time — A large portion of your credit score is determined by your history with paying your bills by their due dates. To get back on track, make timely payments a top financial priority.
  • Having your on-time rent payments reported — If you rent, this is probably your biggest expense, so make it count. You can arrange to have your rent payments reported to the credit bureaus.

In time, you’ll be able to upgrade to an unsecured credit card and qualify for other loans. If you keep up good credit habits, your score will eventually bounce back.

2. You’ve put off establishing credit — for a really long time

If you’re in your 30s and still don’t have an open credit account in your name, you’ll have a really hard time getting a mortgage or other type of loan. Despite your delay, there are strategies you can use to start building credit right away.

A good place to begin is pulling your credit report to familiarize yourself with the information on it. You’ll also want to open a credit card because this is an easy way to build credit quickly. Luckily, there are several cards on the market that cater to people with a limited credit history.

After several months of responsible credit card use (staying out of debt and paying your bill on time), you might want to consider opening an installment loan. This will improve the mix of accounts on your credit report and give you another opportunity to build your score.

3. You’ve maxed out more than one credit card

Maxing out cards hurts the portion of your credit score that comes from your credit utilization ratio. Multiple maxed-out cards means an even greater loss of points.

The first thing you should do is try to raise your credit limits. Your utilization ratio will go down because your balances will be a smaller portion of the increased limits. Just be sure you’re disciplined enough to resist the urge to do additional spending.

The next step is to pay down your cards. This not only improves your utilization ratio, it also saves you money on interest.

4. You have accounts in collections

When an account is sent to a debt collector, it essentially means that your lender has given up hope that you’re going to pay on it. The credit bureaus view this as a sign that you’re not a reliable borrower, so your score will take a big hit.

Some credit scores now ignore paid-off collections account, but that’s not true of all. But this information will only stay on your credit report for a maximum of seven years, and might drop off sooner. The best thing you can do is learn from this mistake and take steps to keep it from happening again. These include:

  • Making a budget so that you’re sure you can pay your bills.
  • Tracking your spending.
  • Only taking on payments that you can comfortably afford.

Rebuilding your credit after a slip-up takes time. But the good news is that no matter how serious the mistake, your score can be restored.

This article was updated Sept. 16, 2016

Worst-case scenario image via Shutterstock