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How to Recover From Bad Credit

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Recovering from bad credit is possible but you have to be willing to take ownership of your mistakes

Are you suffering from bad financial decisions that have impacted your credit score? According to, 34% of Americans have credit ratings that are either “poor” (300 to 579 FICO score) or “fair” (580 to 669 FICO score).

That’s very unfortunate because, like it or not, your credit history gets tied to all the things you need: Your mortgage, insurance, cell phone service, … you can even be rejected from certain jobs based on your FICO score.

But it doesn’t have to stay that way forever. If you’d like to recover from your negative credit history, then here are some tips to turn your financial life around.

Take Responsibility for Your Situation

I remember there was a guy I worked with who was the sum of the word “disgruntled”. He was broke, divorced, in trouble with the law, and not exactly a great person to be around.

No matter how much of a raise or bonus the company would hand out that year, he’d still complain that it wasn’t enough to pay his bills.

He kept blaming our employer for his financial problems, and it always seemed like he was waiting for his fairy Godmother to stop by and fix everything for him.

People, please don’t be like this guy!

Regardless of how he got into financial trouble in the first place, one thing was clear: Until he was ready to accept responsibility for his current situation, nothing was ever going to change.

If you truly want to turn things around, then you have to commit yourself to getting a handle on your finances.

Don’t wait for anyone else to do it for you. Start taking action immediately to change how you manage your money and focus on those strategies that are going to have the greatest impact.

Determine Your Actual Budget

Where’s a good place to start changing how you manage your money? How about with your budget!

Starting today, consider it your personal responsibility to review every transaction going in and out. If you don’t recognize a specific charge or can’t say what it was for, then be critical of it.

The goal of this routine is to ensure that you’re spending less than what you’re earning. The wider you can make that gap, the more it’s going to help you along the way with paying off your credit balances and building an emergency fund (more on this below).

In addition to working out your budget, be sure to also not take on any new debt.

I can’t tell you how many times I’ve heard of people with bad credit who still get offers for more cards or loans. It’s just a recipe for trouble, and I encourage you to resist the temptation.

Work With Your Creditors

Every time I’ve ever called a company about a bill or offer, I’m always delighted to find that there’s an actual human on the other side that is willing to work with me on my issue.

I wish more people would call their creditors and discover the same thing!

Creditors want to be paid, and if you’re willing to come to the table with some kind of a repayment arrangement that’s fair and reasonable, then chances are good that they’re going to work with you. They might reduce your minimum payment amount, waive your late fees, or even adjust the payment schedule to something that works better for you.

But you’ll never know until you try. So don’t be afraid. Set your pride aside and give them a call to see what kind of a deal you can work out.

Rebuild Your FICO Score One Purchase at a Time

Let’s face it – there’s no erasing the past. No matter what some shady credit repair business tries to sell you, there’s no way to hit the reset button.

All you can do to repair your credit score is start making smart, strategic decisions about how you will use credit starting today.

To get started, if you’re not already paying your bills on time, then this is a simple change that can have an incredible impact on your credit history. 35% of your FICO score is made up of your payment history, which includes paying your balances on time and at least making the minimum required amount.

The second biggest contributor (30% of your FICO score) is to reduce your balances as much as possible. The best way to achieve this is to follow a rule that I use myself: Don’t let your credit card balance get any higher than what you can afford to pay off in a single month.

Again, this is going to come back to reviewing your budget each month and determining how much you can actually afford to spend.

Don’t Be Afraid of New Credit

If you’ve had a bad run with credit (or never had any credit at all), then you might be tempted to stay away from it altogether. But in some ways, avoiding credit is the same thing as having bad credit.

Take it from the perspective of your creditors. Remember that the majority of your FICO score is made up of your payment history and how much available credit you’re actually utilizing.

So if you avoid using credit, that means you’ll have little to no payment history and show almost no usage.

This is why you should always have a credit card handy; even if it’s just for small, regular purchases like gas or groceries. Normal, periodic usage and on-time payments will go a long way to prove your creditworthiness and raise your FICO score.

Build Your Emergency Fund

Think about how you got into this situation with bad credit in the first place. Perhaps there was an emergency and you needed the money quickly. Or maybe it was a lack of proper budgeting for unexpected expenses.

Either way, you need a buffer between you and the next situation where a big purchase is going to be put on your credit card. This is why you need an emergency fund.

Your emergency fund is your insurance policy against having to resort to high-interest credit cards and rip-off loans when you need money quickly. Even if your emergency fund sits in a savings account earning no interest at all, this is still better than the risk of getting into debt unnecessarily.

If you have no emergency savings at all, start small. Focus on saving up just $1,000. This might come from putting $50 aside with every paycheck, a raise at work, or your next IRS tax refund.

From there, work on building your emergency fund up to 3 to 6 months of living expenses. Once you’ve got that kind of protection, you’ll be in a much better position to protect yourself from just about any financial threat that comes your way.

The Bottom Line

You don’t have to live with a bad credit history forever. Though there’s no erasing the past, there are several things you can do to take control of your finances starting today.

Through actions like taking responsibility for your situation, budgeting, working with your creditors, and slowly rebuilding your credit score, you’ll be able to change your habits and get on the right track.

From there, you can help keep yourself out of future financial trouble by not being fearful of new credit and building up an emergency fund.

Great credit is one of the pillars of financial freedom. The more you work on recovering from bad credit, the more you’re going to see the rest of your financial situation flourish.

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