This article looks at how we manage our debt in order to build credit back up. An auto loan can be a huge responsibility, but it can also be an excellent way to build credit when you find that your score is getting low.
Sometimes it can be difficult to adequately manage our finances. Things come up, emergencies happen, economies falter and then we get left with large amounts of debt that we can pay back. Unfortunately this happens all too often, and one of the first things that people let go when they fall on hard times is their credit accounts. They stop paying their monthly credit card bills and loan repayments and then they have bad credit. But many of us want to get back on the right track and start living debt free, and here’s one way to do just that!
The first step in managing your financial situation is to remain calm. Many people stress out at first and it leaves them too upset to carry on with managing their debt. Many others will often ignore their debt by refusing to check their accounts to see what they owe or throwing away their bills every time they get one without even opening them. This leads us to the next step.
Look at your accounts! See exactly how much money you owe! Some people ignore their accounts for so long that when they come back to them their interest rates have skyrocketed and what was originally a small and semi-manageable debt becomes a massive undertaking. And on the flip side, some who ignore their debt for fear of what they might learn about it are often pleasantly surprised to learn that what they thought was a huge amount of debt is actually a quite manageable sum. And figuring out exactly how much you owe is the most important thing you can do to manage your debt.
And along the same lines as not avoiding your bank accounts, another important step is to stop lying to yourself! It is very important to start a household budget and be honest with yourself about exactly how you tend to spend your money. Start by first making a budget that is out of your means. Make a budget that reflects how you currently spend your money and shows you all the things that you are buying that you can’t really afford. Then trim the fat! It is important to know exactly where your money is going and where it needs to be going. Once you come to realize what spending you are doing that is harmful and unnecessary, then you can see where you have room to save and manage your debt properly. When you have trimmed the fat and set up a more realistic budget two major things you should consider are your credit card payments and your savings. Start budgeting as much over the minimum card payments as you can afford. The more you pay per month now, the faster you will pay off the cards and with less interest to boot! Plus, paying more than just a minimum payment is a great way to build up your credit score and repair credit damage. The other thing to take into consideration is your savings. Everyone should try to put away a little money every paycheck in case of emergencies. It doesn’t have to be a huge sum of money if you don’t feel that you can afford a huge sum, just as long as you are saving something although of course the bigger the better. It is important to always have a bit of money stashed away in case of an emergency.
The next important step to getting your money back on track is to create a plan. Once you have looked at the different ways you can curb your unnecessary spending, you should try to budget out the extra savings every month and distribute that money amongst your debt in a way that will reduce your debt the fastest with you paying the least amount of money. This means paying off the highest balances and the highest interest rates first. Try to start by making minimum payments on the credit accounts with the lowest debt amounts and make the highest payments to the accounts with the highest interest rates and highest balances. This will have you paying off the high interest accounts the fastest and will save you money in the long run.
You should also be wary of consolidating your debt. Consolidating your debt means to take out a large loan to cover all of your existing debt and then pay back that loan on a regular basis. If you think you can manage to do this without getting yourself back into trouble then it can be a great tool, especially if the interest rate on the loan is lower than most or all of the interest rates on the separate accounts. But before you consider consolidation think about what got you into trouble in the first place. Once your credit cards are free and clear it can be very tempting to run them back up again and then you get stuck with the same mess you had before. But if you do think you can handle the responsibility of consolidation, it can be one of the best ways to get your debt back on track because of the lower interest rates that can sometimes be available.
Once you’ve managed to follow all these steps and get yourself out of debt you may still be left with a wounded credit score. Once you’ve paid off all your debts and there’s still the place left over in your budget where your credit payments used to be then you may want to start thinking about doing what you can to mend your credit score. It may sound crazy, but one of the best ways to do this is to use more credit! First thing is first though. Make sure after you are debt free that you cut up all but one of your existing cards. Keep the card with the lowest rate and only use it for emergencies. It may seem tempting to build your credit score by buying things on your credit cards and this method can easily land you right back where you started because of the low monthly payments. If you have trouble meeting your obligations again, like we said before one of the first things to go is the credit payments.
A good way to build credit back up once you've done this is to, oddly enough, make a major purchase on credit like getting an auto loan. This may seem like a bad idea, but in actuality it can be a great way to build credit and keep yourself from having trouble again. The reason for this is because an auto loan requires sizeable monthly payments and it isn’t something that you should just jump into. When looking to purchase a new car you have to be committed to it and really plan out how you can pay for this purchase in advance. This will allow you to be more determined and responsible with your auto payment than with a credit payment because purchases with a credit card can easily be split second decisions that rack up money quickly whereas an auto loan is carefully planned and thought out. An auto loan can also be very good for building credit because auto dealers are more willing to lend to those with damaged credit. Be careful though! An auto loan is a huge responsibility and should only be undertaken when you are certain that it is something you can afford.
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