We have become a society of debtors. The buy now pay later mantra has become the norm for most Americans. How did this happen and how can we change it? Fifty years ago, having debt was frowned upon, people saved for things they needed or wanted.
Even a generation ago we were told if you were using credit cards to pay for groceries you had a debt problem. Now everyone has a pocket full of cards that they use like free money. Sooner or later though the debt will catch up to you. Whether it’s buying your dream home, a new car, or that big dream you will need to have good credit. Knowing where you stand is the first hurdle in getting out of debt.
Where do I start?
Before you can fix your credit, you need to understand where you stand. This is done by checking your credit report. Everyone can check their report for free once a year. Log on to www.annualcreditreport.com and see what your creditors are looking at. You can usually print it out so you can really study it. Make sure there are no mistakes. If there are errors, you want to contact the credit bureau and have them corrected. There are two major credit reporting bureaus so be sure you checked them both. Be prepared, sometimes they will want proof that you paid this debt. Also any debts that were in collections will stay for seven years, even after they are paid.
What is my FICO score, and why should I care?
Your FICO score is the number given to you by the credit industry to help businesses know how good a risk you will be when you ask for credit. It is based on a formula that is:
- Payment history 35%
- Amounts owed 30%
- Length of credit history 15%
- New credit 10%
- Types of credit 10%
Having a good mix of credit types helps to improve your credit score. It is better if you have a couple of credit cards, a car loan, a small personal loan, even student loans.
Your FICO score will run from 400 to 800
The higher your score the better. Having a score of 600 or less means you’re a risk and businesses might not want to take a chance on you.
The Road to Good Credit
1. STOP USING YOUR CREDIT CARDS!
This will be hard at first, almost impossible, but the sooner you wean yourself off them the better. Take them out of your wallet and put them somewhere hard to get to.
2.NEVER PAY THE MINIMUMS!
If you are only paying the minimums start adding at least five dollars. Otherwise you are only paying the interest, that’s like paying rent on your own money.
3. ALWAYS PAY YOUR BILLS ON TIME.
If remembering to pay to pay on time is part of your problem set up automatic payments. These will only be minimums so you will need to add to them later. This might seem difficult at first, with no credit cards, you will have to either make do or live without.
4. PICK YOUR SMALLEST DEBT and PAY IT OFF FIRST.
Instead of paying the minimum try to double the payments till the balance is zero. Once that debt is paid off apply that amount to of money to the next smallest till it is zero. Move up the line till you are totally debt free.
5. SIGN UP FOR CREDIT MONITORING.
Signing with a credit monitoring site, like Credit Karma, will help you keep track of your progress. As you watch your debt go down and your FICO score go up it will seem worth the sacrifice.
6.KEEP ACCOUNTS OPEN.
Don’t close accounts once they are at zero. This will increase your available credit.
7.ASK FOR HELP
Contact your creditors and ask for a lower interest rate, or make other arrangements. They want you to pay and will appreciate your honesty. Credit counselors can help you set up a plan for getting out of debt. They can show you where you got off track, and even call your creditors for you.
9. STOP APPLYING FOR CREDIT.
You may think a new card will give you more available credit, but not using it may be hard to resist.
10. GET A SECOND JOB!
If you have painted yourself into a corner a second job might be the only way to get out. Getting out of debt is like losing weight. A lot of hard work, but worth it in the end.