Tips for restoring credit

Every young person has likely heard the warnings from parents or older friends and relatives: beware of credit cards and accruing significant debt. While such advice is common, it's rarely taken, as many young people find themselves fighting a difficult uphill battle against debt.

But young people aren't the only ones who have traditionally proven less than responsible when it comes to credit. Scores of people across the country are buried by debt, many so much so that their monthly payments often go just toward finance charges or interest. Restoring bad credit can seem impossible. Fortunately, it's not. Difficult? Yes. Impossible? No.

Where most people find restoring their credit most difficult is changing their spending habits. Even if you've cleared yourself of credit card debt, for instance, you're likely to tempted to use the card soon thereafter, despite knowing full well the difficulty you had in clearing yourself of that debt in the past. For those looking to restore their credit and not make the same mistakes twice, consider the following tips.

+ Develop a budget. This is best and most easily done by listing all debts you owe, bills you must pay each month (i.e., rent, utilities, etc.), and other monthly expenses and then comparing those monthly expenses to monthly earnings. Seeing the two next to each other can be frightening. However, it can also be eyeopening, showing just how much or how little leeway you truly have for frivolous spending each month.

Once you've seen what you owe and what you earn, you can develop a budget that fits accordingly. Make sure the budget is realistic. Spreading your money too will not only make you miserable, but it leaves little wiggle room in case of emergency.

+ Use your savings. If you have substantial savings and substantial debt, use the former to pay off as much of the latter as you can. Debts, particularly credit card debts, often carry high interest rates, much higher than the interest rates your savings will earn sitting in the bank. That means your debt will be increasing significantly each day you have it, while your savings will only witness a marginal increase sitting in your bank account.

It's best to use your savings to pay off highinterest loans or debts first and foremost. For example, say you have an unsecured bank loan with a balance of $8,000 at 11 percent, but a credit card debt of $3,000 at 30 percent. Though the bank loan debt is higher, you're better off paying off the credit card debt first, as the accrued interest on the credit card debt is actually higher (and will continue to get higher), despite the value of the bank loan being more than double the amount of the credit card debt. It's always best to pay off higher-interest loans or debts first to avoid accruing more debt.

+ Try to re-establish credit. Despite having bad credit, if there is a past creditor you've had a good payment history with, re-establishing that relationship can be a great first step toward restoring your credit. Such creditors are often willing to re-establish a relationship, figuring you're worth the risk. Take advantage of that willingness if it's there, as other creditors you haven't had a positive relationship with likely won't be so welcoming.

+ Read the fine print. Many people with bad credit jump at the chance to open new credit accounts, figuring it's a great way to re-establish themselves and restore their credit history. Unfortunately, that's not always the case. Companies offering "special offer" or "introductory" interest rates are often too good to be true and should be avoided. Oftentimes, someone with bad credit who dives into offers such as these finds himself right back where he started, with a mountain of debt and facing debilitating interest rates. Always read the fine print in credit agreements before signing up for a new account.

+ Avoid filing for bankruptcy. In the United State, some people feel as though Chapter 7 bankruptcy is a "Get Out of Jail Free Card." In fact, it's more of a "Extend You Stay in Jail Card." People who file Chapter 7 will have that appear on their credit report for 10 years. Congress has long been considering toughening bankruptcy laws, making it harder to file and more damaging if you do. Chapter 7 can wipe out your debt, but it will make it extremely difficult for you to establish a relationship with lenders down the road. It might even make it difficult for you to get an apartment, as landlords are within their rights to refuse you, and often will if a bankruptcy appears on a background check.

If you must file for bankruptcy, consider Chapter 13, which is more a repayment plan than a debt relief. Under Chapter 13, you are agreeing with the U.S. Bankruptcy Court to repay unsecured debts over as much as 60 months. Future interest rates won't be low if you file Chapter 13, but lenders have traditionally proven far more willing to deal with filers of Chapter 13 bankruptcy than those of Chapter 7.

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