CREDIT: STARTING OVER

We have been discussing various aspects of credit issues. Most of the information is right out of my new book, Stop Flushing Your Money Down the Drain. This particular article is dedicated to those who are wrestling with poor credit or considering bankruptcy.

BANKRUPTCY
Nobody wants to go through this situation, and it should be avoided if possible, but if you find yourself in a credit hole that you cannot realistically expect to resolve for three years or longer, it may be your best choice. The first thing to do is consult with a credit counselor or a qualified bankruptcy attorney. If you do elect to go this route, do not make things worse by beating yourself up.

It does not benefit society to punish people who have struggled financially, so laws are in place to give people a second chance at productivity. Lots of good people have had to go this route including four past Presidents and this author.
Once the bankruptcy is over, it is not overly difficult to get new credit established. With prudent action, a person in this situation can usually obtain new credit to buy a home and car in one to two years. Thereafter, responsible behavior will pay dividends, just like it does for everybody else.

To get back in the game, follow the steps later in this chapter called The Starting Gate.

CLEANING UP BAD CREDIT
Perhaps you are struggling financially, but not so badly as a person who goes the bankruptcy route. For those with serious, but less dire, circumstances here are the basic steps to clean up your credit reports.

1) First things first. Take your financial temperature by getting a copy of your FICO credit reports (www.myFICO.com/12). Examine the report in detail. Dispute anything that you think you can improve such as debts that are inaccurate or not yours (see previous chapter for details). Pay special attention to the four reasons your credit is suffering. Take any immediate steps that you can to address those issues and especially whichever item they have listed first. Write a quick letter to the credit bureaus to clean up any inaccurate personal information such as marital status, address, and employer.

2) It is better to spread your credit card debt out so that no one card is overly burdened. For example, if you have three cards, each with a thousand dollars in available credit and one card is maxed out while the other two cards have a zero balance, it would be better to shift the debt so that each card is carrying one-third of the debt. Generally, you do not want your balance on any particular card to exceed 30% of the available credit. If you are still over the 30% balance, contact your lenders to see if they will raise your credit limit. This will usually increase your score.

3) If you have equity in your home or other property, consider consolidating your debts into one larger loan. This seems like a contradiction to the previous paragraph, but real estate loans are treated differently than consumer credit. There are several other benefits: You should get a lower rate; you can probably make lower payments; and the interest is probably deductible on your income taxes.
Unfortunately, I have seen MANY people abuse this tactic. The ink is barely dry on their loan documents and they go out to dinner to celebrate. When the bill comes they pull out their credit cards… again!!! Before long they have the same problem, only this time they also have a new and bigger debt on their home to go along with it. Refinancing is very dangerous if you do not modify your spending habits because sooner or later real estate values won’t be able to bail you out. Then you might lose everything you own.

4) Lenders are eager to overcharge anybody who is willing to pay a higher interest rate than the lender is willing to accept. Be certain you are not among that group. Call you creditors and ask them to lower your interest rate. They will frequently do so right on the spot, simply because you asked. This exercise will lower your payments. Repeat this procedure every 90 days or until you are certain they will not lower your rates further.

5) If you have any fees such as over-limit fees or late-payment fees, call your creditors and ask them to waive the fees. If you have been a customer for several years, and you have a decent long-term record, you have a good chance of getting these fees waived.

6) Cash-out other accounts. If you have an IRA or a stock portfolio or other path to cash, consider tapping those accounts to pay off your debts. It makes no sense to have one account paying you a small interest rate (which is taxed) while you have your own debt at an even higher rate.

7) Modify your behavior. If you cannot pay your cards in full every month, put them away and make other sacrifices. Keep modest amounts of cash on hand instead of credit cards. That way you will guard your cash carefully (Note: this technique will not do you any good if you constantly run to the ATM to make up the difference),
Depending on how serious your problem is, you may need to get rid of a car that has payments and drive a clunker with no payments. Sell any frivolities such as a boat, an unnecessary vehicle or raw land that you might have. Use the money to pay down your debts.

8) Renegotiate your debt. If the above items are not enough for you to solve your problem, you can contact your creditors (not collection agencies) and restructure the debt. You usually have to be behind on your payments to convince them this step is necessary, otherwise everybody would seek such relief. If you elect to go this route, the creditor will likely post a derogatory comment to your credit reports indicating what happened. That negative remark will stick with you for a long time, but you can recover, usually within a year or so.

9) Adopt a new philosophy about credit and debt. Do not use your cards to buy anything if you cannot pay off 100% of the purchase when you get your next statement. Never, ever carry a balance on your cards.

10) Monitor your accounts forever. Paying attention and keeping score will keep you from getting into this problem again. But more importantly, it will free up money you can use in much smarter ways: Namely, to Save Consistently and Invest Wisely.

Oddly, it may be better to file for bankruptcy than take the slow path to recovery, as just spelled out. Creditors sometimes consider people who have filed for bankruptcy to be less risky because the process leaves them with fewer debts, and they cannot repeat the procedure for quite a while.

Your comments are welcomed

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