by Thom Fox

Most of us do not strive for bad credit. Layoffs, illness, divorce, and unexpected expenses are not things we plan on or look forward to, but they happen. If you have gone through a financial hardship and your credit rating has suffered, what should you do?

Fortunately it is not incredibly difficult to reestablish a good credit history. One of the easiest ways to get started is by obtaining a secured credit card. A secured card works just like a regular credit card, but with one difference—it requires a cash deposit. Your credit limit is usually determined by the amount of your deposit. Sometimes the credit limit is equal to the amount of your deposit; sometimes it is a bit more.

Before you use the secured card, take a moment to recall what caused your credit to suffer in the first place. Did you have an unexpected hardship, such as job loss or illness? Did you take on more debt than you could handle? Did you mismanage your money? Whatever the reasons were, remember that if they happened once, they can happen again.

The next step is to ask yourself if your situation really has improved. One of the most common traps consumers fall into is that they do not change their spending behaviors to match their new situation. The best way to get a handle on your spending is to create a budget. Once you have your budget on paper, ask yourself the following questions:
 
Does my income cover all of my expenses? If not, you need to either reduce your expenses or increase your income. Now is not the time to take on more debt.

Do I have any savings? If not, what kind of financial cushion do you have in case of an emergency? It is recommended that you have savings equal to four to six months of expenses. For many people, it can take quite some time to save this amount of money. Chances are good that if you are trying to reestablish your credit rating, you do not want to wait that long. There are practical issues to think about, such as having the ability to purchase a car or a home in the near future, and most of us need good credit to get those. To make sure you are comfortable taking on another monthly payment, pay yourself each month just as you would pay a creditor. Continue to pay yourself for four to six months. Start by opening a savings account with your next paycheck. By paying yourself each month, you will be saving some money and showing yourself what kind of effect new debt will have on your budget.

Can I afford to make another payment on time, every month? If there is any doubt, do not take on more credit. If you miss payments, you will continue to damage your credit rating, not reestablish it.

How much of a balance can I pay off all at once? You do not want your credit limit to exceed your ability to pay the balance in full. By keeping your credit limit down, you will never find yourself overextended. Remember, with a secured credit card, your deposit determines your credit limit, so you have some control over your credit limit. This system makes it easier to keep your balance manageable.

Once you reach the point where you are getting unsolicited credit card offers in the mail, do not apply for any unless they offer favorable terms. Just keep doing what you are doing, and over time you will see better offers as your credit rating improves.

Do not open too many accounts. Having too much available credit can hurt your credit rating as well as tempt you into old spending habits.

Maintaining a good credit rating is more than making timely payments; it requires sound money management and intelligent choices.
 
Thom Fox is a public speaker and personal finance author who has helped develop numerous programs for young people and adults. As an expert in the field of personal finance, he has served as a guest lecturer for the Bruce Wells Scholarship Upward Bound program at Clark University and as a panelist for the Nichols College “Cycle of Debt in America” student Q & A and the California JumpStart Coalition “Innovative Financial Literacy for Youth” conference.