debt
Attack credit card debt
The plan in 6 steps:
1. Start a budget.
- Track all spending, big and small.
- Create a written budget of all expenses.
2. Attack credit card debt.- Set up automatic payments for each credit card to stop the late-payment fees.
- Pay extra on the card charging the highest rate.
- Systematically pay down credit cards
3. Deal with unpaid medical bill.- Contact original creditor and negotiate.
- Get on a monthly payment plan to get rid of this debt.
- Ask creditor to put a note in credit file.
4. Start an emergency savings account.- Once all credit cards are paid, start a savings account.
- Put $250 per month in savings.
5. Work on improving credit score.- After mortgage is approved, set up an automatic payment through electronic bill pay
- Be careful not to spend more than budgeted on expenses.
6. Get back on the retirement savings cycle.- Sign up for employer's 401(k).
Keys to success
- Create a process for tracking every dollar spent and made.
- Consistently spend less than you make.
- Use the debt pay down calculator to create a complete schedule to zap debt.
- Go electronic and end late fees. Put all monthly payments on automatic bill pay.
- Don't hide from creditors. Call and negotiate payment options.
- Start an emergency savings account.
- Contribute to tax-deferred retirement accounts.
The plan
Get current on bills
Although credit repair is the ultimate goal for Angel, she needs to begin by getting her finances under control. The only way to do that is to create a budget. This will give her greater control over her undocumented spending habits. She will need to keep track of her spending and limit her impulse purchases on those high-interest credit cards. Once she knows where the money is going, she can attack the credit scores. The two largest factors in most credit scores are timeliness of payments and the amount of outstanding balances. Angel can take steps to improve both of these. Angel has made a good start by setting up electronic bill payment through her bank. What she must do now is have an automatic payment made to each credit card account on a monthly basis. As long as this is a reasonable amount, and she can check by looking at past statements, she will cover the monthly minimum payment and reduce some of the outstanding balances. By setting up automatic payments she does not run the risk of missing payments again and will improve her scores. This strategy has the added benefit of taking the cash out of her account, which lowers the temptation to withdraw it from ATM machines. Dealing with emergencies
While Angel feels she needs four cards to fall back on if she has a financial emergency, she would be well served to reduce her total level of debt. She should make extra payments to reduce the principal on the card with the highest interest rate first. Then she should work at them one at a time until the debt is reduced. Paying off the credit card debt will improve her debt-to-available-credit ratio, which will help her achieve better rates in the future. She should aim for outstanding balances of less than 25 percent of her credit limit. |