Restoring Credit

Reasons for Financial Difficulty
Warning Signs of Credit Problems
Coping with Financial Crisis
Restoring your credit
Summary

Reasons For Financial Difficulty

Maybe your company is getting ready to lay you off. You wouldn't know that in advance.

Maybe you get sick and are unable to work for a period of time.

You can't really control these things, and in most cases you can't prevent them from happening. What you can do is:

• Manage your finances well.
  
  
• Keep your credit in good shape.
  
  
• Save money for emergencies.

But what if your credit isn't in good shape when you get sick? What if you don't have savings when you lose your job? What then?

Before you start to panic about financial disasters that haven't happened yet, learn how to read the warning signs of credit problems.

Learn how to prepare for and cope with a financial crisis before it occurs – and how to live through a crisis if you're already in one.

Common Reasons for Financial Trouble:

• Reduction in income from job loss, divorce or death in the family
  
  
• Emergency and/or unexpected expenses (such as hospital bills)
  
  
• Defective goods and services, such as your car needing a new transmission or your house needing a new roof
  
  
• Fraudulent use of credit cards
  
  
• Poor money management from overspending, compulsive shopping and buying things you can't afford
  

Warning Signs of Credit Problems

Is it hard to decide which bills to pay every month? If you answered yes, you're not alone.

If you can recognize the warning signs of credit problems, you can do something about it. Take an honest look at your financial management patterns to recognize the warning signs. Ask yourself difficult questions and give honest answers.

Be honest about how you pay your bills:

• Are you consistently charged late fees on all your bills?
  
  
• Is it hard to decide which bills to pay each month?
  
  
• Are you only able to buy groceries by using your credit card?
  
  
• Be honest about your credit cards and loans:
  
  
• Do you spend more than 20% of your net monthly income to pay for your credit cards?
  
  
• Have you ever borrowed money to make payments on existing loans?
• Are your credit cards maxed out most of the time?
  
  
• Do you have so many credit cards that you can only pay the monthly minimum?

Be honest about your priorities:

• Have you ever put off something important, like going to the doctor, because you didn't have enough money?
  
  
• Do you work a lot of overtime or have a second job just to pay your basic living expenses?

If you answered yes to any of these questions, you're not alone. You probably have friends or family members who've been in some of these situations before. You might even know people who've struggled to stay afloat financially their whole lives.

It's easy to fall into the trap of financial instability. But, while it may seem difficult at first, it's not impossible to get yourself out of the trap. Start by learning how to cope with your financial crisis. Then you can find ways to climb out of the trap, achieve financial stability and restore your credit.

Coping with Financial Crisis

It's easier to manage a problem when it's still small.

When something unexpected happens, you might feel too overwhelmed to do anything. But if you learn how to cope with the situation, you can handle anything. Remember to keep calm.

Seek financial counseling right away. Free counseling services are available. Keep in mind that it's easier to manage a problem when it's still small.

Call your lenders and creditors. Let them know you're having financial difficulties. They can't help you unless you tell them what's going on. You'd be surprised at how helpful they can be during a crisis. Work with your creditors to get on a payment plan. You might even be able to restructure your debt.

Be honest with your creditors. Don't make promises you can't keep. If you really can't afford to make a payment until next month, tell the truth.

Don't be discouraged. It might take longer than you predicted for your financial crisis to go away. Be persistent with your creditors. Establishing a good relationship will get you farther than running away from your obligations. This is very important - your future financial stability is at stake.

Pay yourself first. As you start to pull yourself out of the financial crisis, remember to set aside money for savings. This will give you a cushion for financial crises in the future. Then you'll be on the road to financial health.

Restoring Credit

Don't give up. Restoring your credit takes dedication, patience and time.

A damaged credit history can be improved over time. Follow these steps to get your credit back on track:

1. Make a list of all the debts you owe, including creditor names and addresses.
2. Prepare a realistic budget.
3. If you're overdue on any bills, contact your creditors right away.
4. If you have savings, consider using it to pay as many bills as you can.
5. Be diligent about monitoring your credit report.
6. Consider selling some of your assets with cash value.
7. Consider getting a second job to pay off your debts.
8. Consider other sources of money, such as borrowing from your retirement account (as a last resort).

After completing these steps, there are still more things you can do.

Try to re-establish credit with former creditors. Contact former creditors with whom you had a good payment history. They may be willing to re-establish a credit relationship with you.

Consider offering security on a loan. Secured loans are tied to collateral, such as real estate or cars. Remember that if you default on a secured loan, your collateral may be repossessed.

Consider opening a secured credit card account. This credit is tied to a deposit in a bank account. You can charge up to the amount you deposit. Verify that the bank issues reports to the credit bureaus.

Open a co-signed credit account. A co-signer is a person who is willing to sign with you on a credit or loan application. In the event of nonpayment by you, the co-signer becomes responsible for the debt; both parties credit ratings are affected.

Don't open new credit accounts unless the terms are acceptable. Try to avoid "introductory" or "special offer" interest rates.

Don't be afraid to ask for help. Affordable financial advice is available. Above all, don't give up. Restoring your credit takes dedication, patience and time.

Summary

If you can recognize the warning signs of financial trouble, you're better prepared to handle a crisis. It's easy to fall into the trap of financial instability. You can pull yourself out of that trap and restore your credit by:

• Contacting creditors right away
  
  
• Being honest about your situation
  
  
• Negotiating payment plans
  
  
• Considering alternative ways to establish good credit
  
  
• Avoiding "credit repair" companies
  
  
• Not being afraid to ask for help

Remember to be patient. Restoring credit takes time.