Individuals with bad credit ratings, whether from too much debt or a failure to pay back bills on time, face a number of challenges. In addition to the difficulty of securing loans at reasonable rates of interest, these individuals may struggle to pay down their current debts, which can be compounded by punitive interest rates and fees. Fortunately, there are a number of strategies for these debtors.
Paying Off Bills
The fastest way for a person to improve his credit rating is to pay down all of his debts. In some cases, the person will not be in a financial position to do that. However, if he is, paying down balances on credit cards and eliminating any delinquent debts will give his score a quick shot in the arm. Carrying a small, nondelinquent balance will also be acceptable.
Restructuring
If a person cannot pay down his debts, the best he can do is make sure that the rest of his payments are on time. In some cases, a person with bad credit will struggle to meet the minimum monthly payment on various bills each month. To avoid sinking into a mire of fees, the debtor may wish to attempt to restructure the repayment plans offered by each of his creditors so that he has to pay less each month.
Consolidation
In some cases, an individual will benefit from receiving a debt consolidation loan. When a person consolidates his debts, it means that a lender is paying off all his debts and then issuing the borrower a new loan, usually equivalent in size to the sum of the debts. However, to make a profit, the lender will usually charge interest on this loan. So, while the person may have to make only one monthly payment each month -- often in a smaller amount than he was making before -- his total debt burden may increase.
Settlement/Bankruptcy
As a last-ditch effort to prevent his credit and financial status from further deterioration, a person may wish to settle his debts with creditors or to declare personal bankruptcy, in which case his debts may be reorganized or discharged. However, this will badly hurt the person's credit rating. A bankruptcy will stay on the person's record for up to 10 years, while a settlement will stay for up to five. That said, once the person is out of debt, he can begin to take out new credit and rebuild his credit rating by paying new loans back on time.
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