How to Make the Most of Bad Credit

For many people, the best lessons in life come from learning things the hard way. If you are one of the millions of people with a low credit rating, you're probably getting a financial education from the school of hard knocks right now. For those of you who have held on to decent credit scores so far, take this opportunity to learn from the mistakes of others. When it comes to money troubles, an ounce of prevention is worth a pound of cure.

Don't be fooled by the free T-shirt.
Entire forests have been wiped out to provide the credit card industry enough paper to swamp every mailbox in the U.S. with enticing financial offers. Tables manned with friendly salespeople appear at colleges, sporting events and local hangouts, with banners promising a free tote bag in exchange for a completed credit application. This wouldn't be the case if it were the good deal it appears to be. Nothing's really free in the credit industry; this advertising exists because it's profitable for the companies.

This is how credit card giants attract customers, usually people new to the credit experience. Once you're approved for that first low-limit card, you are rewarded for using it by a steadily increasing credit limit. Before you know it, you've taken advantage of several "free money" offers and find yourself under a mountain of debt. Throw away the mailed solicitations, place your number on the "Do Not Call" list, and avoid eye contact when walking past salespeople who give away worthless freebies.

Don't take it to the limit.
A lot of people are surprised to discover that they have a poor credit rating despite having made all of their payments on time. One of the factors that often contributes to this is how high the percentage of debt is based on their available credit. The credit scoring bureaus deduct points from borrowers who approach "maxed-out" balances because it is generally a sign that the customer may be getting behind or in other financial trouble.

The best rule of thumb is to keep balances below 50 percent of the available credit. That doesn't mean that you can never charge more that $500 on a card that had a starting limit of $1,000. With a good payment record, a borrower can ask for, and will usually receive, a credit line increase up to three times a year. (Hint: that same borrower showing that he pays on time can also request a lower rate periodically.)

Don't go hog wild.
While the temptation to use a credit card to purchase something you don't have the cash for is great, it is also the trap that fells the most consumers. For some reason, even the smartest of us can rationalize spending when all it takes is a swipe of the plastic. It's just so easy; run the card at the register, beam at the salesperson when it's accepted, and walk away with your brand-new something (that you probably didn't need).

Next time you feel the urge to buy impulsively, stop a moment. Ask yourself, "If I didn't have the credit card in my wallet, would I make this purchase?" If the answer is no, then you probably can't afford it in the long run. Credit cards can make us act like perpetually teenagers, shopping 'til we drop with no thought of the consequences. Unfortunately, the truth is somber: you are going to have to pay for it someday, and, unless you can pay your card off each month, you're going to pay a lot more than the purchase price when the balance accrues interest. Every little purchase builds on the ones before. Did you really intend to pay $20 for a $2 ice cream cone?

Don't be that good of a friend (or relative).
Your brother calls - he just got an amazing deal on a car that is sure to disappear from the lot today, but he needs a co-signor to qualify for the car loan. He is the primary borrower and the monthly statements will be sent to him. He'll make the payments every month. Could you just put your name on it, too, so he can be approved?

The answer is no. No, sorry, I promised my financial advisor/father/spouse/dog that I would never co-sign on a loan, regardless of who asked. I believe that you would make the payments, but I need to buy a car, too/have terrible credit/am wanted by the IRS. It doesn't matter how you say no, just that you say no. Nothing good ever came from co-signing for someone else's purchase, but it's a fast way to ruin your credit for something you never even got to enjoy.

These are just some examples of the lessons you can learn by making the wrong decisions the first time. Or, by reading about other people making these decisions. Every day it seems like more and more business transactions, and even employment opportunities, are affected by your credit rating. Guard it as you would your most prized possession. It pays to have good credit, literally.