For many families, buying a home has become a much more difficult task then they originally thought it would be.
Over the last few years, tough economic times have put a lot of financial stress and strain on people and families. Many people lost their jobs and found it difficult to pay their bills, including their credit card bills.
Unfortunately, many Americans had, and continue to have, high minimum monthly payments because of outstanding credit card debt. While you may not be able to get your credit back to perfect overnight, there are some things that you can do to help boost your score and improve your financial situation.
What Is a Secured Loan?
A secured loan is a type of loan given by a financial institution based on your ownership of a valuable piece of property or item like a motor vehicle. While most people don’t refer to loans from places like pawn shops as secured loans, receiving money for pledging an item like a valuable piece of jewelry or musical instrument, which will you get back if you repay the money borrowed, at a fairly high interest rate, is another type of secured loan.
The Problem with Secured Loans
Getting a secured loan might sound like a good idea to somebody in serious financial trouble who has a bill to pay. Many people that get secured loans are unable to pay their mortgage or rent payment, car payment or health insurance, and feel that their assets are the only way they can get the money they need. Simply put, most people that get secured loans do so because they feel that their back is against a wall, and they don’t have much choice.
Secured loans typically come with high interest rates – interest rates that are considerably higher than those offered by credit card companies. In many cases, secured loans often have huge penalties for not paying the minimum payment, which is usually only accrued interest, as set forth in the terms of the loan.
Some secured loans require larger monthly payments than the interest, though some loans aren’t paid each month. In some cases, repayment times for secured loans can be longer than one month. For many people, that means that the interest will build up and make minimum payments difficult.
Fixing Bad Credit
Many people that get secured loans have bad credit, and simply cannot turn to credit cards when they need to pay for things they can’t afford to pay with cash. Usually, that’s because credit card companies think they’re a risk because of a poor credit score.
In order to avoid secured loans when a rainy day comes, you need to work to fix your bad credit now.
Pay Down Your Debt
As the economy recovers, many people find that they have enough money to pay their bills and put a little money away for a rainy day. While there’s nothing wrong with putting money in savings, paying down your credit card debt is something that you need to do before it negatively affects your credit score.
After the typical 90 or 120 day late period, most credit card companies will report debts to collection agencies. Some credit card companies use in-house collection agencies. However, debts more than 120 days outstanding will appear on your credit report, and they will lower your credit score.
If you can’t pay off credit card balances in full, try to pay as much as you can each month above your minimum payment.
Always Make Your Interest Payments
Even if you can’t pay down your debt, you need to make sure that you make your minimum payment each month on every single credit card that you have. Not paying your minimum payments will result in a lowered credit score.
If you can’t afford to make your minimum payment on every single credit card you have each month, make sure you credit card balances that have been past due for the longest period of time. If you don’t do that, you may reach the 90 or 120 day late period, and the credit card company could terminate your account and send your bill to collections.
Make Payment Reminders
Some people have trouble keeping track of all of their bills. For many people that are just recovering from tough financial times, credit card payments aren’t a top priority.
If you have a tough time remembering when your credit card payments are due, use a calendar on your cellular phone or computer to set an automatic reminder. Many free e-mail programs even have calendars that will let you know about upcoming events like bill payments.
A paper calendar can also be used to make payment reminders, though you’ll need to be diligent about making proper notes in each month to avoid missing payments. Missing payments will affect your credit score, especially if you do it more than once in a 12 month period of time.
Online banking has made paying bills much easier for many people, though not everybody utilizes automatic payments. In some cases, people that lost their job or experienced financial strain may have actually stopped using online bill-pay because they had to pick and choose what bills they were going to pay each month due to limited funds.
Setting up an online bill-pay account through your bank is an excellent way to make sure that you at least make the minimum payment each month. You can always add more money to the payment if you can afford to pay down your debt.
Most online bill-pay services will even allow you to change the amount you plan on paying for a single month, which will automatically revert back to the chosen amount the following month.
Don’t Pay Accounts in Collections First
Many people that have had financial trouble, and now have credit card accounts in collections think that immediately paying those accounts off will help their credit score.
While paying off an account that is in collections will help to reduce the total amount of money you owe, which can affect your credit score, the fact that you had an account in collections will stay on your credit report for seven years, even if you do pay it off in full.
You should pay off any accounts you have in collections, but not at the expense of active accounts. That means that paying you should only pay down accounts that are in collections if you can afford to pay more than the minimum monthly payment on each credit card that you have.
Most collections agencies will work with you to allow you to pay down your debt over multiple payments. If you still have outstanding credit card debt for accounts that are currently open, this is a much better option for payment.
The Importance of Good Credit
Rebuilding your credit is important for a variety of different reasons. Having open credit means that you’ll be able to pay emergency medical bills or any other unexpected expenses that are extremely important. Credit cards shouldn’t be used frivolously, but unexpected situations do pop up from time to time, and cash is not always an option.
Keeping your credit intact will also provide you with peace of mind. You won’t have to worry about what will happen if you need to pay a bill you can’t afford all at once.
You also won’t have to worry about not being able to get a loan for a home, car or any other large purchase. It might take some time to rebuild your credit, but it can be done.
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