If you have recently found yourself in credit card debt or filing for bankruptcy, it may seem impossible for things to ever return to normal. With a low credit score, getting good rates on loans can be difficult, and you may finding yourself on a seemingly never-ending cycle of debt. Fortunately, there is hope of regaining control of your life and finances. It is a long road, but here are some tips to set you in the right direction.
Define Your Goals
Whether your goal is to buy a car, or just to get your credit score in good territory, figuring out exactly where you want to be in the future is an important place to start. Once this is established, you have something to aim for, and you can develop a strategy to help you get there.
Find the Initial Cause
Did you have too many credit cards? Did you get behind on bills? Figure out where the debt cycle started so you can try to avoid falling into the same pattern. If you had more credit card accounts open than you could afford, close them until you are at a reasonable spending limit.
Unfortunately, not everything will be within your control. You may have lost your source of income and could not pay your bills as a result. If you have since started receiving income again, find a way to save a little of each paycheck so you have enough to cover a few months’ worth of bills if you ever find yourself in a similar situation.
Create a Budget – and Stick to It!
To get yourself in a place of financial stability, you need to have money, and the only way to have money is to spend within your means. To keep on track with this, set up a budget based on your income. Prioritize where your money goes, making sure you have enough for needs like bills, food, and other items. There are various resources you can use to keep you on track – apps, websites, printable templates, etc. Many of these options are free for you to use, and those that do cost won’t break the bank.
Once you have budgeted out your money, it is important to make sure to stick to it. It is okay to have a category for entertainment, but if you only assign $20 to go to the movies, be selective about what movie you go see. You may have to turn down invitations to go out once you hit your limit, but remember that going over will only keep you in the cycle of debt.
Cash is Key
One of the benefits of paying primarily with cash is seeing your physical money, making it easier to know how much money you do or do not have at any given time. Having a visual can help prevent overspending and continuing the debt cycle. If you know there’s a certain area you are prone to over-spending on, try paying for that solely in cash. That way, when you run out, you are forced to stop spending.
Simplify Your Credit Cards
In order to build up your credit, you need to have credit, and you need to make sure you can make your payments. Do some research to find an inexpensive card with low interest and a low spending rate to keep you in check. Do not use it for everything—save it for things like buying gas or groceries.
Monitor Your Credit Score
Monitor your credit score to ensure you are on the right path. There are three major credit reporting agencies: Equifax, Experian, and TransUnion. Once each year, you can request a copy of your credit report from each of these for free from websites like AnnualCreditReport.com or CreditKarma.com, or calling toll free at 1-877-322-8228. To learn more about your rights under the Fair Credit Reporting Act (FCRA), visit the Federal Trade Commission’s website.
You will not wake up tomorrow with a good credit score, no matter how many changes you make. Remember it takes 7 years for negative items to fall off your credit report, so do not get discouraged. Also remember that there is no magic fix to speed up the process, no matter how much money you pay.
Be Wary of Scams
There are many companies out there looking to take advantage of the vulnerable place bankruptcy and bad debt leaves a person in. Be cautious of companies promising to “fix” your credit, or those offering too-good-to-be-true deals. A good rule of thumb: if they ask for money up front, there is a good chance it is a scam.
Do not think that just because your credit score is not ideal that you cannot get decent loan rates. Some lenders may be okay with your score, so be sure to shop around for different loans to find one with reasonable terms and a decent rate.
Find a Support System
Having a group of friends and family to help you stay on track can make it easier to break your bad habit of overspending. Find people you can talk to about your problem, and ask them to keep you in check. There are plenty of activities you can do at little to no cost, so you can still enjoy life without the guilt.
A support system is also good for when you experience rough days. Some days may be hard, and you may feel like you’ll never recover, but having a group of people around who care about you and believe in you can help you overcome these feelings and keep you going.