By Steve Freidell
Land Line contributor
The thought of being debt-free often seems like a far-off destination on a never-ending route that seems pointless to travel. However, you need to think of your debt as an ever-increasing payload that is causing all kinds of wear and tear on your financial well-being. The longer you haul this heavy burden, the more damage you are likely to do to you and your family.
For instance, when was the last time you checked your credit score? Your credit (or FICO score) is a number between 300 and 850, but what does the score really mean? A low credit score doesn’t just affect your ability to obtain financing for a car, a house or a loan. Your credit score also affects how much interest you pay on each of these debts. The lower your score, the more interest you will be paying.
Additionally, some employers are even starting to check credit scores when making hiring decisions. Employers want to hire individuals who can handle credit responsibly, which provides insight into how you will perform on the job. Think of your credit score as an engine’s horsepower: The larger the number, the more confidence lenders will have that you can handle the large amount of debt being towed around.
So let’s look at a few simple things you can do to rev up your credit score.
1. Pay your bills on time. Unpaid bills and missing payments indicate to lenders that you are irresponsible and, thus, a higher risk. Some lenders view missing 3 or more consecutive payments to be an indication that you may never repay the loan.
2. Limit your credit cards or loan accounts. If you have too many cards, it suggests to lenders that you’re only pushing debt around from one card to the other, digging yourself into a bigger hole. Instead, focus on having one or two credit cards that you can afford to make regular payments on. This will show lenders that you are reliable, and your credit score will go up.
3. Cancel any unused cards, but don’t cut them up until you receive notice that the account has been closed.
4. Never go over your credit limit. Maxing out your card indicates to lenders that you are using more credit than you can afford. Train yourself to pay your credit cards off each month.
5. Stop opening credit cards in order to gain one-time discounts. If you open one card, close another. Lenders view your credit positively when you have maintained long-term credit relationships. Those discounts aren’t worth the risk you are taking with your credit score.
6. Pay more than the minimum amount due. Even if it’s $5 more a month, this extra amount will improve your credit score and shows the lender that you are making more than the token effort to repay your debt.
Now, you may be asking yourself, “What if I can’t afford to do these things?” Maybe you’ve dug yourself into a hole that’s too deep for a simple fix. Here are some recommendations for those that find themselves with heavy-duty debt.
1. Contact each of your lenders and explain your situation. Given the current financial climate, lenders are more willing than ever to negotiate and provide assistance – given that you are serious about taking steps to reduce your debt.
2. Try requesting a lower interest rate. Lenders would rather receive some interest than none at all. Many are willing to reduce the rate if it means you make payments on time. However, if you abuse this privilege, expect the lender to kick your rate back up to the previous high level or even higher.
3. Always start by paying down the debt with the highest interest rate first. Don’t stop making other monthly payments; just apply the most money above the minimum required payment to the most expensive debt first.
4. When all your credit cards are paid off, begin using that monthly payment to pay down other debts such as cars, houses and student loans.
5. Seek out help from one of many Consumer Credit Counseling Service companies. They are free and will work with you and your lenders to help solve your credit problems and work out payments that are more manageable.
6. Avoid bankruptcy at all costs. Bankruptcy has far-reaching consequences – most of which can be more difficult to solve than just paying off the debt.
Ultimately, the most important thing you can do to reduce debt is to spend less money. I know it seems obvious, but we’ve all been conditioned to believe that going shopping is a pleasurable event. It can almost reach the point of addiction. This is probably how your credit got damaged in the first place, and it won’t improve until you stop shopping for entertainment.
Remember, reducing debt is all about making sacrifices in the short term to ensure a brighter future for yourself and your family. It’s certainly a challenge, but so is anything in life worth doing. Now get motivated! LL
This material has been prepared for informational purposes only; it is not intended to provide and should not be relied upon for accounting, legal or tax advice.
Steve Freidell has assisted clients in their cash management, trading, and portfolio management of fixed income securities since 1975. Steve started his career at the First National Bank of Kansas City and later served as first vice president with Commerce Bank where he served his clients for 25 years. In 2006, he joined the DeWaay organization, the financial management company utilized by OOIDA.