Your credit rating is a record of your financial activity that helps lenders to determine what you can afford to borrow, and the risk involved with lending. A bad credit rating happens when you miss repayments, and borrow and spend irresponsibly. On the other hand, a good credit rating is the result of responsible borrowing, and making repayments on time, as agreed with your creditors.
A bad credit rating can cause you some issues when it comes to obtaining future credit. Minor scars on your record will not cause too much damage, but long term records of your failure to make payments will set off the alarm bells of potential creditors, who may be reluctant to lend you the money you desire. A creditor may also charge higher interest rates when loaning to a person with bad credit, to make up for the extra risk.
If you do have bad credit, then do not despair; there are many solutions available.
The first step, and the one that is required even if you choose to apply a debt relief solution of some kind, is to take a responsible approach towards your debt, and towards repayments. Getting out of debt requires long term effort. You must prove that you are capable of making repayments on time. If you are already in bad debt, then it helps not to take out any more credit in the meantime.
Focus instead on meeting repayments for your existing credit, and try to pay down your debts to a low balance. One method to do this effectively is to pay down balances with the highest interest rates first. This results in the least amount of money being paid back. Another method has more psychological benefits; you could pay off the smallest of your debts first, and work up like that.
When you have paid off existing debts it will be possible to improve your credit score by assuming the same sense of responsibility in the future; borrowing only what you can afford to repay. This way you can build up a positive track record.
Initially, it might seem impossible to keep up with repayments, but with some care and attention with budgeting you may be able to free up some cash to put towards your debt. Carefully examine your debts, income, expenses, and other financially relevant information, and assess whether there are any changes you can make in order to make repayments on time. Often this means making cuts to spending, though you could also consider whether extra income is a possibility.
If you need help understanding your finances, and how to budget in order to pay off your debt, and gain a good credit rating, then professional financial management is an option, and can provide valuable knowledge and advice.
A debt settlement is a process whereby you, or a professional acting on your behalf, negotiates your debts with your creditors, in order to try to gain more favorable terms of repayment that you can afford. If you are missing repayments then this will cause you a bad credit rating, and it is essential that you get back on track. A debt settlement can give you more breathing space, and allow you to get on top of your payments once again.
Formal debt agreements are also available for those who are suffering from bad debt, but they have drastic effects on your credit rating, and should only be considered if you cannot foresee another way out.
A debt consolidation loan is a solution whereby all of your existing repayments to multiple lenders, and consolidated into one loan owed to a single lender, with one monthly repayment based upon what you can afford. Obtaining a debt consolidation loan has little effect on your credit rating in and of itself, but gives you the opportunity to regain control of your repayments. If you can pay back your consolidation loan responsibly, and to the agreed schedule, then you will demonstrate your ability to manage your finances and debts, and will therefore improve your credit score.