|Profile: Angel Smith|
|Low credit score limits mortgage-financing choices.|
|Boost score with auto bill pay and by zapping card balances.|
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.
Get current on bills
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
This elimination of high-rate debt can save her about $250 a month in interest charges that eventually she can use to start her emergency fund. Normally, we would recommend that she set up an automatic monthly transfer into a savings account for an emergency fund, but in this case we believe that this should wait until the credit card debt is reduced.
Negotiate with creditors
When she is talking to them she should ask them if they will put a note in her credit file that the obligation is satisfied as soon as she pays it off. This should help improve her credit history. It is important to try to get this agreement while she is negotiating a payment schedule with them. It might be the only time she has any leverage. Repairing past debt issues and getting her bills paid on a regular schedule will go a long way toward an improved credit score and lower credit card rates.
The purchase of her first home can help improve her credit score if she stays on top of the payments. Angel should make sure that the Monthly PITI payment will be automatically deducted from her account and that all of the new payments for her home are made in a timely manner.
Used retirement savings for home, now fix it
She should sign up for her new 401(k) plan at work as soon as she is eligible. At a minimum she should contribute 6 percent of her salary. Her company’s generous dollar-for-dollar match on the first 6 percent makes this is a no-brainer.
A bright future
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