Credit scores are like a grade in school: they are a record of financial responsibility and credit use skills. The major credit rating agencies naturally use factors such as timeliness of payments, total amount of debt owed, the number of creditors owed, and the income and assets of the debtor. With the recent financial disasters, there is a tendency on the part of the credit raters to give less weight to one time or low amount debts, but the basic process still emphasizes a low debt to asset ratio.
Step One: Create a personal debt reduction plan.
Gather your credit card statements, along with all the other bills you pay. Then add up the monthly total you are liable for paying. Put the debts in order by amount owed, from largest to smallest debts. Write a list of all the payments in that same order, with the monthly payments and the balances owed. Then subtract the grand total of monthly payments from your monthly income. Is there anything left of your income each month after everything has been paid? If so, then you can begin to apply a bit more each month to the largest credit bill. As the months pass, this additional payment will begin to whittle down the amount of debt you carry. When the first credit account is paid in full, go to the next largest one and do the same additional payments. If you do not feel in control enough to do this yourself, then take all your bills and statements to a credit counselor to have them help you. Included in this debt reduction effort should be a factoring in of your basic living expenses such as housing, food, transportation and health costs.
Step Two: Negotiate with creditors to reduce the balance owed and the interest rates charged.
As you initiate your debt reduction plan, with the extra payments defined for the largest creditor, go ahead and contact that creditor and ask for a modification of the balance and interest rate. You will show good faith if you have already made payments that are greater than billed. Now you have leverage to ask the creditor to also show good faith by reducing the amount owed or reducing the interest rate imposed. Many times a creditor will be willing to do this on request rather than risk a complete non-payment or the debtor filing a bankruptcy. If the creditor seems unwilling to work with you to make the terms more agreeable, then consult with a credit debt manager who can do the negotiating for you. Face the endeavor with courage and enter it with the attitude that you will get some accommodation, and your chances will be enhanced.
Step Three: Change the way you use credit
One you have stabilized the volatile credit debt situation you have drifted into, then you can commit to making fundamental changes in the way you use credit. To begin with, you can take stock of how many credit cards you currently hold and use. If you have more than three, you are indulging too much in the use of credit. Actually one good credit card is sufficient, with rapid full pay back of the balance. A good rule of thumb is never to charge more than you can reasonably pay off in three months. Any credit cards that you have not used in a year or more, discard them or cancel them if there is no balance owed. Then begin to practice alternatives to using the credit card too often.
once stabilized, monitor your credit often. Build your credit score in simple ways, such as charging small amounts and paying the balance off soon after, with a payment made on time.
Step Four: Schedule Regular Budget Reviews
Conduct a thorough review of your budget on a quarterly schedule. A look at your income and financial obligations every three months will reveal both progress and problem spots. This review should show a diminishing debt total and ideally, an increasing income level. If it does not, then look for ways to substitute lower priced or even free alternatives to high priced expendables. Become “bare boned” about the essentials and avoid longing for luxuries that will do nothing to improve your life situation. Create personal challenges for yourself, asking yourself “ how long can I make my present shoes serve me, instead of buying more pairs?” and “what can I get for free to fill the need instead of spending money for this item?” Such questions will lead you into a new way of thinking about the things you need for everyday living, and the value of those things you desire but can live very well without. Become an environmentalist, recycling what you used to throw away, and making double use out of things you previously used once and threw away. In short, change your outlook and you will improve your money circumstances.
