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Managing Debt Recovery - Part 3 - Managing your credit
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Part 3 of a three, (3), part series explaining how to put together and manage a debt recovery plan. This module discusses how to manage your credit during debt recovery |
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In this three part series we have already talked about the stark realities of debt and the conversation required with yourself to finally choose how to get out of debt. We have also talked about how to get out of debt using the debt snowball method. What we need wrap this in a nice package with a bow is to discuss how to manage your credit while in debt recovery.
First off, if you have credit cards that have no annual fee you need to keep them active. Do not cancel your credit cards unless there is an annual fee attached. If there is an annual fee then feel free to cancel that credit card otherwise, keep it. It is important for your credit future to have credit available. There is a ratio used by banks to evaluate your ability to pay back a loan. This ratio is calculated by dividing the total debt you owe by the total credit available to you. For example, if you owe $15,000 total an you have $20,000 in total authorized credit then your debt to available is 75%. That's not your best number. However, once you start working on bringing down that debt, that percentage will get smaller and smaller. The smaller the percentage, the greater your ability to pay back a loan, (in the eyes of the bank). Of course this is not the only factor but it is a large determining factor.
Do not use your debit cards. It seems like the consumer banking industry got together one day and decided that they wanted to collect a lot more fees from you. If you have bills that get automatically drafted from your debit card it is easier than not to lose track of your spending if you also use your debit card for basic transactions like grocery shopping, buying gasoline, or a cup of coffee from wherever you like to buy coffee. Through helping consumers with credit card debt settlement we have been a witness after the fact to NSF, (non-sufficient funds), fees of $35 each for items like coffee, gas, fast food, sticks of chewing gum. Maybe you have this problem and maybe you don't. Still, stay away from using your debit card and pay cash instead. You will still want to carry your debit card with you because you're going to need to take cash out of the ATM from time-to-time so you can pay cash for almost everything, (keep reading to find out why we say almost).
Do not freeze your credit cards. Oh, it sounds like a great idea but it's just a lot of work to magically place a credit card in the center of a block of ice. Plus, if you really want to use your credit cards, the blow torch to melt the block of ice may damage the credit card if you're not careful. :) Just don't do it. You are going to use every one of your credit cards at least every couple of months. Not at the same time, mind you. We're not suggesting you go on a spending spree ever couple of months, you're just going to use them from time to time for things you would normally pay cash for and that's it. If you have six paid off credit cards total, you're going to carry three with you every month, Just put them in your wallet or purse and use them for things you would normally pay cash for like gasoline, groceries under $50, and other basic household items. As soon as you use one card, move it to the back of the three card pile. Then next time you have to buy another basic living item, use the next card. Try to use all three cards in the month. Do not use credit cards that are not paid off. If all your cards are in your debt recovery program, then you will wait until at least the first card is paid off. Do not use the credit credit cards for non-essential living expenses like coffee, home repair, or chewing gum. These are products and services you will want to pay for in cash. Why, because you are in debt recovery and need to train yourself to spend your money like the rich do, (we will talk more about that towards the end).
As soon as the first statement arrives, you are going to send the credit card company a check for the total amount you owe on that card. This should be easy to do since you have not spent this cash. Remember, you are only charging for items you already have the cash on hand or in your bank account to pay for. If you do not have the cash to pay for it, even if it is a basic living expense, you want to avoid buying that item at the time. If it is gas you need then you are going to need to budget for that. If you find out you do not have enough money for gas then try to evaluate where you drive and cut back where you can. It is serious when you do not have the cash or cash available in your bank account to pay for basic living items. It is very serious if you are forced to charge those items on the credit card hoping or knowing you will pay it off after payday. Think about it. You are always going to have those expenses. If you allow yourself to pay for items with your credit card that you do not have the cash to cover then you are continuing the cycle that you yourself are trying to break. You will always have basic living expenses and as difficult as it may be, you have to do this right. The benefit is that you will be a better person and everybody will like you. Ok, maybe they will and maybe they won't but you will be better off financially because you will have learned how to manage your money the right way.
Check your credit report annually. The Federal Trade Commission has reported that the only true free annual credit report Web site is annualcreditreport.com. This is where you want to check your credit and see if there is anything wild going on with your credit. Check to make sure there are no new loans or credit accounts that you did not sign up for. Look and see if there are collection accounts listed and find out why. Make sure your contact information is correct for all three major credit bureaus, (Equifax, Experian, TransUnion). Speaking of which, make sure you check all three reports for accuracy in reporting. Not all creditors report to every bureau but you can make sure that if a creditor reports that you are current to Experian, for example, that they also report you as current to TransUnion, if they report to both. Unless you are actively managing your credit to qualify for a loan, you will only need to check your report every year. We are not going to discuss identity theft in any greater detail other than to say that it is out there and it does happen. But, if you are careful about the websites you visit and where you enter your social security number, then you should be safe from online identity theft. Also, do not download viruses or other malware.
There are a couple things to keep in mind when managing your credit. Creditors also do not like to lend money to nomadic tribes. Meaning, do not move too much. Unless you are in the military, creditors do not expect their borrowers to move twice in two years. Also, try and keep your job. Stable income is important to a creditor. If you have managed to stay at the same job for longer than two years that is a great sign that you will likely stay employed. If you have to change jobs then try to do the same work at the new place of employment. Creditors understand that people change jobs for a variety of reasons. They also understand that if you are doing the same work for another company it was probably a simple career progression. Do not apply for new credit more than once or twice a year. Too many application triggered credit inquiries will bring down your credit score. A couple a year is no problem unless your credit health is already lower than it should be. Until you get your debt recovery in full swing, you might consider staying away from credit applications.
The most important aspect of debt recovery and credit management is to see it all the way through. You really can be rich and defining "rich" is easy. Somebody is rich when they have no substantial debt, have assets equal or greater than one-million dollars, and have income enough to support themselves. Now, maybe that's not everybody's definition but that is ours. You meet rich people every day and never know it. Believe it or not, a rich person can drive a beat up old car and clip coupons. Most rich people do not waste money. Most rich people are self made and got to that level by learning and maintaining sound financial habits. We want everyone to be rich and anybody can be rich but not everyone is because it requires either being given enough money to be considered rich or it requires a long-term financial strategy that begins with a discipline that most are never taught. It goes beyond never outspending your income. There are little things you can do every day to build up your wealth. The fact that you are reading this now should be evidence enough that you have what it takes to be a rich person. There is no magic pill to get rich but there is formula that works like magic. Getting out of debt and managing your credit are a large part of that formula.
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