Credit Problems & Options

A problem with your credit can limit your options when you want to borrow money or increase the amount of interest the bank will charge you for a loan. In order to fix credit problems, you need to identify them and then find solutions you can manage on your budget. It may take time to fix your credit problems.

Too Much Debt

If your debt-to-income ratio is too high, it can lower your credit score. Banks may be unwilling to lend you money if you have too much debt. You can find your debt-to-income ratio by dividing the total amount of your monthly debt payments, including your mortgage, by your income. If the ratio is higher than 35 percent, you should work on reducing the amount of debt you currently have. The best way to do this is to set up a debt payment plan. Focus on one debt at time and pay extra money on that debt until it is paid off, then move to the next debt on your list. Many people choose to work on debts from the highest interest rates to the lowest.

Incorrect Items on Credit Report

An incorrect item listed on your credit report can cause your credit score to go down. Your report may show an account you did not open, a defaulted account you have paid off or a late payment when you paid on time. To find if you have any incorrect items, check your credit report each year. AnnualCreditReport.com allows you to check your credit reports once a year for free. To correct an item, you must contact the financial institution that reported it and ask it to correct the item. Then you need to contact the credit bureau and ask it to double-check the information. This process can take several months.

Late Payments

A series of late payments or loans in default, meaning you stopped paying the loans, can negatively affect your credit. The best way to fix this problem is to begin making your payments on time consistently. The most recent credit history weighs more heavily than old mistakes. If you can show you are now responsible with your money, the bank may be more willing to loan to you. You should also take care of any loans you have in default. Save up the money and make the payment all at once or contact the bank to settle the loan --- you must have a lump sum to offer them as payment in full. Paying off the debts in full looks better on your credit report, but settled debts are better than defaulted loans.

Don't Qualify for a Loan

You may not qualify for a loan because your debt to income ratio is too high, you have a poor credit history with late payments and loans in default, or you have just declared bankruptcy. One option is to save money and pay cash for things for a few years instead of borrowing money. Another option is to find a co-signer for the loan.