Escape The Credit Trap
*Organize your records and pay all collections, charge-offs, and judgments:
1) Pay the smaller bills off first and make arrangements to pay the larger bills in installments.
2) If you make a payment plan on the larger collections and stick to that plan for at least 12 months, the underwriter may approve your loan even if you are unable to pay the debt in full. However, you should make every attempt to pay all collections in full. (if you are seeking a mortgage to buy a home).
3) Get all payment arrangements in writing.
4) Get paid-in-full letters for all debts that are satisfied.
5) Obtain a RELEASE / SATISFACTION OF JUDGMENT for all judgments that are satisfied. (Also, if a judgment was erroneously entered against you and/or if the plaintiff is willing, request that the judgment is VACATED. This will prevent the judgment from showing up on your credit report at all.)
6) If you are paying these debts off before closing on a house, please pay via money order, western union, money gram, or cashier’s check and save the receipt for your records. Also, get a letter from the creditor indicating that your account has been satisfied or settled and send a copy of that to your lender as well.
*Continue to pay all current bills on time each and every month, with a special focus on those creditors that report to the credit bureaus.
1) Pay all bills even if they are not reported, since creditors may decide to report outstanding debts (for example medical bills and utilities) to the credit bureau in the event they are not paid on time)!
2) Pay your bills with a check, money order, or another electronic method that can be verified in the event there is a dispute regarding your payment history.
*If you have student loans, consider consolidating them into a lower payment and request a deferment/forbearance if you are unable to pay them now.
1) Contact the Direct Loan Servicing Center: (800) 848-0979 or http://loanconsolidation.ed.gov/
2) Contact Sallie Mae: (800) 272-5543 – www.salliemae.com
*Contact all three credit reporting agencies to make sure accounts are reported accurately. You are entitled to one free credit report per year: www.annualcreditreport.com.
2) Dispute all incorrect information and be prepared to submit documentation to validate your dispute.
Stop using credit cards right now1) Use your lowest interest card for real emergencies (if it doesn't involve the real and immediate risk of becoming homeless, losing a job or going without medical care, it's not an emergency).
2) Cut up the rest. Don't close the accounts! Closing good paying history will reduce your score.
Negotiate with your lenders, card accounts and collection agencies for lower interest rates and fee forgiveness.
Pay what you can over the minimum payment every month.
1) Drop your change in a jar and use what you save to add to your minimum payments.
2) Apply some of your windfall money (tax refunds, side jobs, gifts, etc) to credit balances rather than buying more stuff.
Start using the snowball method of debt repayment.
1) Lay out your credit cards in order from lowest to highest balance.
2) Starting with your lowest balance card, add as much as you can to your minimum payment
3) EVERY MONTH and send it all to this account. Keep paying the minimum on your other cards.
4) When you pay off the first card’s balance, apply all the money you were paying into that account to the card with the next lowest balance IN ADDITION TO the minimum payment that you’ve already been paying on it. (Since you’ve been paying it out anyway, your expenses out aren’t increasing. They’re just being concentrated.)
5) When the next card is paid off, repeat the process: Put all the money you’ve been paying (the minimum payments for the paid off cards plus whatever extra you can add) on top of the minimum payment you’re already paying on the next card and so on. You’ll find that the further you go, the bigger the payments you can make and the quicker those balances are paid off. But since you were already making these payments anyway when you still had the balances, you’re not putting any more money out than you were previously (except for the extra amount you originally added on.
Cut your credit I.V.
1) Keep one card that you’ve had the longest (see your credit report if you’re not sure) for emergencies and for items that require a card. The purpose of keeping the oldest account is that it establishes your credit history as far back as possible. It doesn’t matter what the interest rate is since you’ll be paying off your balance every month from here on out. Right? Right.
2) Leave the card at home in a file. You’ll be able to get it if you really need it, but it won't be available for impulse purchases while you are out of the house.
3) Stop using the other accounts and pay off the existing balances as soon as you can.
[Note: if your credit rating is still pretty good, you may want to talk to a credit counselor about taking this step. In some cases, closing accounts can lower your credit rating, but so can having a lot of unused available balances hanging around. So you may want to have a professional’s input on whether you should close the accounts or just request that your cardholder lower your limits. But if your credit rating is already suffering, it won’t matter much either way.]
4) If you do have to use your emergency card, do what you have to to pay that balance off every month, before interest rates can start jacking it up (and jacking you up) again. This is what you use that emergency savings account for – you know, the one you’ve been building with the money you aren’t spending on credit payments every month. Right? Right.