Rebuilding and Establishing Credit After Debt

Debt: the four letter word none of us want to talk about.  
Often unplanned, debt can get you into trouble if you fail to keep it in control. No matter what you amount of debt you may carry it can be stressful to owe money no matter what your financial status. When you accumulate debt it can be very discouraging, but eliminating debt needs to be one of your top priorities considering the consequences of a large amount of debt. 

Having too much debt will hurt your financial health in the long term and short term.

Damage to your Credit Score: In the short term, having too much debt can lower your credit score.  One of the most important things credit bureaus look at when calculation your score is the Credit Utilization Ratio. Basically they look at how much credit you have in relation to the amount of credit that has been extended to you. If your Credit Utilization Ratio is high your credit score will fall, and you may not be able to boost it back up until you pay down the balances.

Financing: Financing is another short term consequence. If you have too much debt your ability to get financing may be compromised. Lenders typically are hesitant to work with individuals who have a large amount of debt in relation to how much credit has been extended (Credit Utilization Ratio).

Judgements: If you are not able to repay the debt you have incurred your creditors may file a lawsuit against you for repayment.  Once a lawsuit is filed the court can issue a judgment against you which may lead to the garnishment of your wages, or levy your bank account; this could force you to have your monthly paycheck reduced for how ever many years it takes to repay the debt to the creditor.

Efforts to Pay off Debt: Another long term consequence of having a large amount of debt is that it can take years to pay off. Making small payments could take you more than 20 years to payoff. Worse case scenario for every minimum payment you make, you could be charged the same amount of interest. 

Tips to Help: Adopt a strategic approach
Never use credit to purchase things you will not be able to pay for in the future. Resist impulse purchases. Understand the true cost of a purchase. For instance: You want to buy a the latest and greatest flat screen TV, retailing for $5,000. If you purchase on a credit card with 12% APR, compounded daily, with minimum monthly payments of $166 paid over 3 years, your TV winds up costing you $5,980. Is it worth spending an extra $1,000? Also consider: In three years the price on the TV you purchased will have dropped and a new model will have replaced it. 

Credit is designed to improve purchasing goods and services. When used responsibly it is a success. There will always be things we need but do not have all the cash available, but as long as we understand the cost of convenience (finance/interest charges) and the commitment to make on-time payments until the debt is repaid, it allows one to purchase homes, vehicles, and other things that may me impractical to wait until we have saved all the funds necessary

When credit is used properly it will be a significant Cash Management Tool. The cost of credit is reduced by paying off your balances promptly, in order to lessen the impact on your pocketbook.

Know how much you owe. Make a list of your debts; list the creditor, the amount of debt, monthly payment, and due date.  Use your Credit Report to confirm your debts. Up date your list every couple months to document any changes.

Make your payments on time each month. Late penalty charges make it harder to pay off debt. If you miss two payments in a row some creditors increase your interest rate and finance charges naturally increase. If you are more than 30 days late on your payment the credit bureaus are notified.

Change your payment due date to make it more convenient. If you get paid on the 10th, you may want to change your due date to the 14th or 15th of the month. If you have all your payments due at once, or if you would like all your bills to be due around the same time talk to your creditor about re-aligning the due dates. Write the due dates on you calendar or set an alert on your smart phone of when payments are due.  

Use Internet Banking. If you use internet banking you can set up reminders for when a bill is due, and your bank will send you an email reminder, or even take advantage of your creditor 's online option of having the minimum payment due to automatically paid from your checking account on the due date.

Set up an emergency fund of cash savings that you can quickly access in emergency situations. A good emergency fund ranges for a minimum of three months living expenses to a desirable one year of living expenses.  So if the amount of money you need to survive each month is $1500, your emergency fund should range from $4,500 to $18,000.  The primary purpose of the emergency fund is to allow for the unexpected: loss of income and unexpected expenses. If you use your emergency fund for non-emergency purchases, i.e. vacations, furniture, or various luxuries, it will not be available when you really need the cash. 

Tips to build your Emergency Fund faster: any time you get a bonus or tax refund put it in your ER Fund, if you get a raise at work put it in your ER Fund, Reduce your spending on discretionary items, Put your ER in a savings account that you will earn a little interest on your savings, keep a change jar and throw in pocket change daily, it adds up quickly.

The Federal Trade Commission enforces the Fair Debt Collections Practices Act (FDCPA), which prohibits debt collectors from using unfair, abusive, or deceptive practices to collect money owed.  This includes collections agencies, lawyers who collect debts, and companies that buy delinquent debts to try to collect them.

It is strongly suggested that you find a reputable attorney to answer any legal questions. The information may help you to have a better understanding of how to manage debt, how it affects your credit score and provide answers to some of your questions, but it in no way serves to completely educate an individual on how to manage all types of debt.