Oran Hall | Fixing bad credit
I have received several queries in recent weeks about how to repair bad credit, attain financial restoration, and get financial freedom. Readers have also sought to know where they can get counselling, which institutions offer debt consolidation and the reliability of online entities offering debt relief services.
Financial institutions are very ready to offer credit for many purposes – auto purchase, vacation, travel, other consumer desires, education, home renovation, for example – to whomever they deem qualified to borrow. One has “a loan for just anything you can think of”. And credit cards just will not allow themselves to be left out. The reality is that many borrowers are in deep trouble.
Many borrowers do not seem to realise they are in trouble until they are drowning in debt. The following are signs that somebody has too much debt: using an increasing amount of income to pay debt; the collectors keep calling; cheques are being returned by the bank for ‘insufficient funds’ or tagged ‘return to drawer’; the credit card declines because the limit has been exceeded; dependence on the overdraft facility to pay recurring bills; using cash advances on the credit card to pay other bills; the tendency to make the minimum payments on the credit card; borrowing to pay basic bills such as utilities; and not knowing how much one owes.
Not all borrowers fall into trouble by carelessness, indifference, and poor planning. Some encounter problems because of unexpected changes in their ability to service their debt due to job loss, sickness, and major family catastrophes. A meaningful emergency fund is the best insurance against this problem.
Repairing a bad-debt situation requires making hard decisions. Making contact with creditors should be one of the first actions. Here are some other possible actions. Sell assets, if possible; use savings to reduce debt; liquidate investments to generate funds – these can be rebuilt when financial stability is restored. Find ways to increase income, if possible, and reduce spending by creating a credible budget to reflect the new reality.
To reduce spending, start by cutting unnecessary expenditure and spend only on necessities. Next, reduce or eliminate discretionary spending like entertainment. Reduce required expenses although this may prove to be more challenging because it means reducing basic lifestyle expenses. Some of these are fixed and others are variable. It is easier to adjust the variable expenses such as food and utilities. It may be necessary to reduce some fixed expenses – rent, for example. Relocation to an area where it costs less in dollar terms may help.
With regard to credit card debt – which should be seen and treated for what it is, short-term debt, which is very expensive – it is not a means of meeting normal living expenses, and there should be a clear view of how the debt is to be paid before it is incurred. It would make sense to explore the willingness of the financial institution to give a loan to liquidate the credit card debt. This would make debt servicing less burdensome and establish a time for the elimination of the debt.
Where there is more than one debt obligation, make eliminating or reducing the most expensive one the priority if this can be done without doing harm to the other obligations. If there are debt obligations to more than one lender, explore debt consolidation. This is not a cure-all and comes with some initial expenses. There is no guarantee that debt consolidation will reduce the monthly payments. In fact, there is no guarantee that an application for such a loan will succeed. Lenders must satisfy themselves that the prospective borrower has the capacity and willingness to pay and has an acceptable credit score.
It may also be necessary to have collateral to be able to secure a loan to replace the existing loans and to have clear title to any assets being considered to be used as collateral.
Assuming a new debt at lower rates and with longer repayment terms can help, but this is often only a temporary fix. What is required is a permanent fix – not just breathing space. Temporary fixes can be very deceptive. They ease the pain but do not necessarily remove the cancer of poor money management – which must be addressed if good financial health is the long-term sustainable goal.
I cannot be specific about the institutions that offer debt-consolidation loans. To determine the banks and credit unions which do, it is necessary to spend time making contact with them and making the enquiries regardless of how frustrating this may be.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.