Having bad credit can make life complicated and even that may be an understatement. It’s harder to rent an apartment, buy a car, get a credit card, among other things. Learning to survive with bad credit can be difficult, but it’s doable.
Build an emergency fund.
In the case of an emergency – an unexpected medical expense or major car repair, for example – you’ll need money and pretty quickly. Since bad credit often means limited or no access to credit or loans, you’ll need an emergency fund to get you out of a crunch.
Emergency funds aren’t built overnight. In fact, it can take dozens of paychecks to build up a reliable emergency fund. If you don’t have an emergency fund, start building one now. Aim to save at least $50 from each paycheck, more if you can afford to.
Let your emergency savings grow. Don’t touch it unless it’s for a true emergency.
Use a budget and minimize your spending.
Managing your spending is key to a solid financial foundation. Even people with excellent should keep their spending under control.
By keeping your spending under control, you can make room in your budget for building an emergency fund or pay down your debt.
Limiting your spending allows you to save up for things you want to purchase – travel expenses, electronics, etc.
Don’t move unless you absolutely have to.
Getting approved for a mortgage or even for an apartment or rental home is tough when you have bad credit. Staying put as long as possible will keep you from going through the trouble of finding a mortgage lender or landlord that will approve you with bad credit.
Moving to a new place might also mean having to pay security deposits to establish new utility, cable, or internet services. If you can’t avoid moving, plan to have a few extra hundred dollars for any security deposits you’ll have to pay.
If you’re trying to rent an apartment with bad credit, here are some tips for a smoother transition:
- Start looking before you put in notice with your current landlord. This buys you some time to find a new place before you have to move.
- Save up a larger security deposit. Being able to pay a larger security deposit may help you get approved for an apartment even if you have bad credit.
- Check for landlords that don’t do credit checks – these are typically individual property owners rather than large apartment complexes. You have a better chance of getting approved if you can avoid a credit check.
Keep a checking account and a debit card.
If you don’t have a credit card and have a hard time getting approved for one, your debit card can be a replacement. You can use a Visa or MasterCard debit card in the majority of places that you’d need a credit card.
You won’t have the option of repaying your balance over time and a debit card doesn’t help you rebuild bad credit. The upside is that you’ll still have the ability to make electronic transactions. Make sure you always have enough money in your checking account to cover transactions. Otherwise, you’ll face expensive overdraft fees.
Note that certain transactions – like renting a car or booking a hotel – will place an authorization hold on some of your funds until the transactions is fully processed. Having a small buffer in your checking account will ensure you have enough money available for spending until the authorization hold is released.
Consider a secured credit card.
It’s tough getting approved for a credit card when you have bad credit. But, to rebuild your credit, you have to prove that you can handle credit responsibly. A secured credit card is often a good choice for people who have a tough time getting approved for credit cards.
With a secured credit card, you make a deposit to “secure” the credit limit. Your credit limit will be equal to, or sometimes greater than, the amount of the security deposit. As long as you keep your account in good standing, you’ll get your security deposit back when you close your account or it’s converted to an unsecured credit card.
Keep consistent employment and copies of pay stubs.
Job stability can help offset a bad credit score. Being able to show a creditor or lender that you can afford to repay a new monthly obligation can improve your chances of getting approved. Consistent income can help prove that you can afford to repay new financial obligations.
Don’t throw your pay stubs away. A potential lender or landlord might ask for three months to two years of pay stubs to evaluate your application.
Be ready to pay more.
Another downside to having bad credit is the additional cost some businesses make you pay. For example:
- Insurance companies may charge higher insurance rates.
- You’ll be charged higher interest rates on loans you’re approved for. The higher interest rate will result in a higher monthly payment. You may be able to offset the high interest rate with a bigger down payment.
- When you’re renting a vehicle without a credit card, you’ll have to pay a higher security deposit.
- Your credit card will likely have a higher interest rate. Thankfully you can avoid credit card interest by paying in full each month.
Cutting back in other areas can help ensure you can afford to pay all your necessary expenses.
Don’t make it worse.
Avoid mistakes that will make your credit worse. Keep paying all your bills on time each month, even the ones that don’t report to the credit bureaus each month. If you have any open credit cards, keep your balances low so you’ll have a low credit utilization.
Items like charge-offs, debt collections, repossession, foreclosure, bankruptcy, and tax liens are the worst for your credit score. Avoid having any of these added to your credit score.
In the meantime, you can improve your credit with timely payments and lower balances. Most negative items will fall off your credit report after seven years (10 years for some bankruptcies).