CREDIT: “TAMING THE MONSTER”
Previously, we started the dreaded conversation about credit. This is an extremely uncomfortable conversation for most people. I’ve found that people are more willing to discuss their religion and political views before they discuss their credit and finances. However, not discussing credit with your spouse can lead to more explosive results. I’ve seen some really bad fall-outs between new spouses because one spouse didn’t tell the other he/she had credit issues before they got married. The spouse who was left in the dark usually found out when they tried to purchase their first house together or some other instance requiring both parties to go through a credit check. That is NOT the time to finally discuss your financial history. The good news is that this can be avoided. Are you guys ready to get your hands dirty? Good.
CREDIT CAN BE TURNED AROUND IN 18 TO 24 MONTHS!
Step 1: Know what credit is and how it works!
What is credit? The most simplistic way for me to define credit is that it is your ability to use your history of paying your past obligations to acquire additional goods or services without having to pay in cash up front. You will have good credit and the ability to acquire things at favorable terms if you have a good history of paying your debts timely. You will have bad credit, and thus have unfavorable borrowing terms (paying higher interest) if you are able to borrow at all, if you have a history of paying late or not at all. Creditors report your payment history to the three credit reporting agencies; Equifax, Experian, TransUnion. Those agencies give you a FICO score, the number used to determine your credit worthiness, based on your history and how you’ve used credit. There’s more to the credit process, but I don’t want readers nodding off by going into it.
Request a copy of your credit reports from all three agencies before speaking with a financial professional such as myself. You’re entitled to a free report annually from each agency. I suggest getting the reports directly from each reporting agency.
Step2: “Too late…I already have some issues with my credit history. So what do I do?” STOP RUNNING!
We all make mistakes. However, our community has had a tendency to look at substandard credit with the mentality of “My credit is bad. It probably can’t get any worse and I refuse to let anyone know I have a problem. I’ll just keep doing what I’ve been doing.” This is a thought process we have to do away with. Face the problem head on. How do you do that? First, learn to live within your means. Second, stop dodging creditors who are trying to collect recent past due payments. Recent past due payments are going to be debts that have not already been sold to collection agencies and the original creditor is attempting to collect. Old debt, debt that is a few years old and has been sold to several collection agencies, may possibly be disputed. I won’t go into detail on that process, but know that it is something you can actually do yourself.
I have represented a few creditors in my bankruptcy law practice. I can’t tell you how many debtors think it is better to dodge creditors. In certain instances, such behavior can be used against debtors to block them from discharging a debt in bankruptcy. I can tell you that creditors would rather work out an agreeable plan where you pay them something rather than have to waste resources and time hounding you or legal action. Let me reconcile this by saying that, as a consumer, you have rights and creditors have boundaries that they cannot cross when trying to collect payments from you. Creditors can neither harass nor threaten you. However, they have the right to pursue payment. Answer the phone and talk to your creditors.
Step 3: How does the conversation with creditors go?
This will not be easy. In fact, it will be painful. Be honest with yourself and the creditor. First of all you need to sit down and do something a lot of us hate doing. Assess your income and come up with a BUDGET. Allocate what you need for necessities (food, clothing, shelter) and utilities. We’re not talking about eating out at restaurants and impulse shopping at the mall when I say food and clothing. Really be honest about what you need to survive. *Allocate a certain amount of funds for savings. Financially savvy people pay themselves.* Next, look at the amount left over after you deduct necessities, utilities, and savings. This is what you will have to work with to pay off debts. Review which creditors you owe and rank them from the ones charging you the highest interest rate to the lowest. You want to eliminate high interest debt first.
Let them know your situation and tell them what you can afford to pay. One of my colleagues tells clients to say “You’ve been calling me. I can’t pay abc amount on the monthly basis. However, I can pay xyz on time every month and your company will not have to call me anymore.”
Here comes the painful part. BE SURE that you can pay this amount and commit to doing it. The creditor will not be happy to negotiate a lower amount, but usually willing to work with you and have you sign a new agreement. *HERE IS WHERE YOU NEED TO USE WHAT LITTLE LEVERAGE YOU HAVE* Make sure the creditor agrees to report every payment you make as “Paid As Agreed” and, if you can, when you pay early have the creditor report that you “Paid Better Than Agreed”. Remember good credit is about establishing a good history. The object is to have your creditors to report to the credit reporting agencies that you pay your bills on time or early. Stay on top of the creditor to make sure they are reporting your payment statuses regularly. Also, don’t regress into bad financial habits by spending all your of income tax return, bonuses, or other windfalls. Buy something small ,as a reward if you have to do a quick splurge. Use the rest to pay early on some of those creditors and put some in savings. Now you’re taming the credit monster.
You should see a dramatic difference in your credit score within 18 to 24 months if you commit to making a change and sticking to the process. This is NOT an invitation to go back out and drive your credit back in to the dirt by racking up more debt. Get into the habit of living within your new budget. Managing your credit is just one aspect of financial planning and can be useful in building wealth. Work with your financial advisor to show you the next steps of achieving your future goals of financial security.
If you feel that you are really really serious about taking action and beginning this transformation; while simultaneously starting a wealth building plan.” Please contact my office at (504) 310-0345 and set your appointment today!
K. Orian Williams, J.D.
Financial Services Professional
Fleur de Lis Financial an agency of MassMutual
Follow on Twitter @KDotFinancials