Bad Credit/High Debt Recovery Ideas

The first step in recovering from bad credit is to take your blindfold off. You can't move forward if you don't know where you are. That means you need to get a good understanding of your financial situation, beyond just the numbers on the bills that arrive in the mail. It takes work, but if you're not willing to make any effort to recover your credit rating, then you're doomed to fail anyway. Might as well crack a beer and turn on the TV if you're not ready to work on this problem! But you're reading this now, so I think you're ready to get down to brass tacks.

One of the best ways to get a grip on your financial picture is to put your computer to work. There are many software programs available, with a variety of prices (including free), that will help you balance your checking account, track expenses, and create useful charts and graphs so you can see what is happening with your money. For example, GnuCash is free (open source) software that will work on Windows, Linux, Mac OS X, and other platforms. Download it now, spend some time learning how it works, and get your own financial data into your computer. It's possible to do all this work without a computer, but computers are excellent at "crunching numbers" so why not make your computer do the work for you?

Photo: kahle (Andrea Kahle) / morgueFile.com

Some people cut up their credit cards. Maybe it slows their use of the cards, or maybe it just feels good. I don't suggest doing this, because even though it can have a short-term positive effect, it doesn't really solve anything.

It is, however, very important to stop using your credit card(s) unless absolutely necessary. So put them in an envelope, seal the envelope, and write "Open only in an emergency!" (or something like that) on the outside. Then put the envelope where you won't see it often, but can find it if you really do need it.

More important than what you do with your physical credit cards, however, is what you do in terms of buying things. If you are buying unnecessary things with cash that could have gone toward a credit card payment, you're only slightly better off than buying those items with the credit card. The important change comes at the point of deciding to buy, or not buy, something. If you're swamped with debt, you absolutely must spend less, or you'll never win.

One way to spend less on items you don't really need is to keep a "success log" -- on it, list each item you were about to buy, but decided not to buy after all. List the price next to the item. Every week or two, total up the money you saved, and make a payment to your highest-interest credit cards. (You don't need to wait for a statement from the credit card company to pay down your balance. More on that later.) With this "success log" you'll be able to see how much your self-control has helped you. In fact, you'll even be better off than the "success log" shows you, because it won't show how much you've saved in interest.

When you're faced with the decision to buy something that you don't really need, ask yourself one question: "What will make me happier, buying this or being out of debt?" Picture yourself being out of debt, and picture yourself with deeper debt but owning the item you're thinking about buying. My guess is, you'll choose being out of debt!

You may have heard "time is money" and you've probably noticed how you're spending a lot on credit card interest. These two things work together, and you can make them work to your benefit as you work to reduce your debt burden.

I know what I used to do. I used to get a credit card statement, check when it was due, and figure out the latest date I could send the payment through the mail without it being late. Sound familiar? I also used to either pay the minimum amount, or I'd round up to a convenient figure (since I'm lazy and don't like to write complex numbers on a check).

That approach to paying your credit card bill is just what the credit card companies want, because it means they get more of your money! By delaying payments and paying the minimum (or close to it), you will pay more interest. Those extra days are time for interest to build higher!

Compare that doomed-to-failure approach with this one: As soon as I can afford to move at least the minimum payment out of my checking account, I submit a payment for the most I can afford. (I have to be careful to leave enough for other bills and expenses, of course.) Then, if I get some unexpected money before the next bill comes in, such as if I sell a used item on eBay or Craigslist, I deposit that money into my checking account and then make an extra payment to my highest-interest credit card. And, I make the payment online, because a check through the mail is too slow! This approach gets the money to the credit card company as quickly as I can manage, because this reduces the interest I will pay. (The measly interest I earn in my checking or savings account is nothing compared to the interest I pay on my credit cards.)

Instead of paying slow and low, pay fast and as much as you can. Not only will you see your outstanding balance drop faster from faster payments, you'll also cut your costs on credit card interest.

Remember above, where I talked about cutting your spending? Look at how much you've spent on credit card interest. Do you get anything for that? No! So it's the best expense to cut, and the only way to cut it is to reduce your balance as fast as you can.

Photo: Ladyheart (Andrea Church) / morgueFile.com

Like cutting up your credit cards, I don't suggest that you cancel your credit card accounts, because it won't help your credit rating. (In fact, it can hurt it.) Once your credit cards have been paid off, it's time to use them, but carefully. Spend only a small amount, and pay off your balance in full every month (or, at most, after carrying a balance forward for no more than one month). By doing this repeatedly, and paying on time every time (never late!), you'll establish the basis of a good credit rating: Financial responsibility.

Credit issuers don't want to see that you have no accounts, because that doesn't tell them anything about you. They also don't want to see high balances, late payments, or a bad debt/credit ratio (meaning, you've used up most of your available credit). What they want to see, and what gives you the best credit rating, is proof that you can manage your finances properly and pay your bills on time.

Here's a step-by-step example, using a card that has a zero balance. (You do not want to do this with a card you're still trying to pay off.) This assumes you have a savings account -- if you don't, get one now!

1. When it's time to go to the grocery store for a few needed items (not a major shopping trip, and no unnecessary items), take your credit card, and use it instead of cash or check to pay for your groceries.


2. Look at your receipt to see how much you owe on that credit card.


3. If you have cash in the amount you spent on groceries, deposit it in your savings account. Otherwise, transfer funds from your checking account to your savings account, for the amount shown on the grocery receipt.


4. Set aside that credit card and do not use it until you've paid it off again.


5. When you receive your credit card statement, immediately transfer funds from your savings account to your checking account. Then, immediately after you've done that, either write a check (if you pay your credit card via mail) or make your credit card payment online, paying the whole balance.

This step-by-step process, repeated every month, will establish a pattern of you using your card responsibly and paying your bill on time. Plus, you'll get a tiny bit of interest in your savings account, at no cost to you (since you would've spent that money on groceries anyway).

Take a look around you. What do you have that you aren't using? What's collecting dust on a shelf, or taking up closet space? Whether you hold a garage sale, head to a local pawn shop, list items for sale in newspapers or online classifieds, or post items for sale in an online auction, you may be able to convert space-wasting "stuff" into cash that you can add into your next credit card payment.

If you hesitate to get rid of something even though you're not using it, just remember: You can't take it with you when you die, but if you ever move, you'll either have to pay (in some way) to move it, or you'll have the hassle of getting rid of it. You might as well do that now and get the immediate financial benefit from paying down your credit card debt faster. Remember, time is money: Unless the item is a collectible that will gain value over time, any delay selling it will just make its long-term value less.

If you need to reduce your credit burden, reducing your clutter burden is a great way to move toward that goal!