I have shared my story and some insights regarding my history of bad credit. Now I want to share with you some of the ways I have turned things around. I will share my strategies in sections over the next few posts.
Keep in mind that I am not a financial advisor, or anything of the sort. I am sharing things I have learned from personal experience.
No Quick Fixes
First and foremost, something you need to know up front is that the only real way to improve your credit is by establishing a good track record over TIME. I don’t think that can be emphasized enough. Sorry people, there are no quick fixes. Anyone who tries to sell you “instant credit repair” is selling you a load of crap. In some instances their methods may work as far as raising your credit score. However, the practices they employ to do this are often dishonest and unethical. Maybe even illegal. And here at Plain Advice, that is not what we are all about!
Paying Down Debt
Step number one in rebuilding your credit is knowing where your credit stands . Keeping that in mind, we are ready for step number two, which is paying down your debt .
This is not to say that you need to get completely out of debt to improve your credit. (In fact, some debt is good to establish a track record of you being reliable in your obligations). The point here is to get your debt to a level that you can reasonably manage. If you cannot manage your debt, you will never be able to raise your credit score no matter what else you try.
Liquidating Assets
About a year and a half ago, Jorge and I decided to sell our house because he was applying to graduate school out of state. It also so happened that we had debt that we were having a hard time managing (ie making only minimum payments, sometimes late because we were living paycheck to paycheck). We sold the house and received enough cash to pay everything off except our student loans. After all this, we still had money left for a downpayment on our next house.
I am not advocating that everybody sell their home to get out of debt (especially in the current real estate market!). For us, it was a very convenient side effect of something we were planning to do anyway.
What I am suggesting is that you look creatively at any assets you might be able to liquidate to put toward this step. Do you have an extra vehicle you can sell? What about a boat or RV? These types of items can make a big dent in decreasing your dent if you are willing to liquidate them. Even small things can add up when you sell them on e-bay.
Apply Windfalls Toward Debt
Another thing to consider is your yearly tax refund. Most people I know spend it before it even comes. Maybe next time, you could consider using it to pay back your creditors. It may not be as fun as a vacation, but the relief that comes with paying off what you owe is huge. Take this into consideration anytime you receive a windfall of money (ie bonuses, cash gifts, etc).
One of the biggest keys to success in managing finances is being able to afford your financial obligations . If you have credit problems right now, you are probably in over your head. It may be uncomfortable to think about liquidating assets, but doing this really will help you get to a much better position financially.
Credit Counseling Services
If you don’t have assets to liquidate, you might want to consider credit counseling services. These companies can help you lower your monthly payments and also decrease the interest you are paying. Sometimes they can even negotiate with the creditor so you pay less than you actually owe when all is said and done. Be very careful and make sure you thoroughly review the comany you are considering. There are lots of scams out there. About 5 years ago, I employed the services of a company of this type. I made payments to them for some time and thought they were paying my creditors. It turned out that my creditors were not receiving timely payments, and I ended up losing money because I didn’t do my homework before sending my money to this company. My credit was worse at the end of this episode than it was before I contacted the company for help.
Also be aware that if you are deeply in debt, but have maintained a decent credit score, debt management services can have a negative impact on your credit. If you already have poor credit, this isn’t so much a factor. The main thing in this situation is to just get out from under your debt, and then you can work on improving the credit.
Bankruptcy
In extreme circumstances, you may want to educate yourself about bankruptcy, and consult with an attorney who specializes in this. While it is true that declaring bankruptcy will negatively affect your credit for at least the next 7 years, for those who have heavy debt that there is no other way out of, it is truly a merciful alternative.
Paying Down Debt Gradually: Doable but Challenging
Of course, there are methods for paying down debt by applying as much as you can toward the principle in monthly payments. This is the most difficult way to get out of debt when you are in over your head, if not impossible. If you have a difficult time making minimum payments, how are you going to make more than the minimum over time to pay off the debt? It’s a vicious cycle, and exactly the reason I am encouraging you to look at other methods that can have a greater immediate impact on your financial profile.
If any of you have any other ideas on how to knock down debt, please leave a comment! Your insight and feedback is a valuable part of this site.
Check back soon for more tips on how to improve your credit.
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