With the global economic crisis of this last decade, far too many people have found themselves in such a deep credit hole that they can’t visualise a way out. And it is not just deadbeats and ne’er-do-wells who are finding themselves in this situation. Many are hard-working, upstanding people, who woke up one day and discovered that their job no longer existed, or that the retirement nest egg they had built over the course of decades had evaporated in a wave of others’ financial irresponsibility. As economic conditions continue to improve, we have an opportunity to raise ourselves up from the devastation we have faced, but we have to be smart and methodical in our efforts. Here are a few general tips to begin your journey back to financial security.
Get rid of the shovel
One of the biggest problems many people have experienced was the sheer surprise of the economic crisis. They proceeded along, day by day, holding to the false comfort that their lives would continue as they had for years, with little thought given to preparing for a drastic, even catastrophic change. They were happy with their retirement plans (if they even had any plans in place), and even the most financially responsible counted on their modest savings to protect them from a “rainy day”. When that rainy day did appear, and turned into a rainy month, year, and nearly a decade, they realized too late that their preparations had either been woefully inadequate or had fallen victim to the machinations of people and institutions in whom they had long trusted. In an attempt to maintain a sense of normalcy, they continued the same spending habits that had previously served them well, effectively digging themselves even deeper into a credit hole. Such people – and you may be one of them – need to reverse that spending and credit course.
Realise that you cannot spend yourself out of debt
So-called “lifestyle spending” can be very seductive, and even more dangerous. Keeping up appearances with a new car every couple of years, buying a new wardrobe, or going on regular holiday excursions are wonderful distractions, but now is not the time to be distracted. “Gazing with hunter’s eye”, as poet Theodore Roethke wrote, not “toward eternity”, but at your routine spending habits, is essential. Learning to economise on even the most mundane items might be uncomfortable at first, but it is a great way to start pulling yourself up out of that financial hole. Become conscious about setting the thermostat on the furnace a bit lower, take advantage of bargains when shopping, and learn to get the most use out of everything you own or purchase.
Start with positive steps to fill the hole
Begin to repair your relationship with existing creditors. Even if you have little in the way of disposable income right now, keep an open line of communication with those to whom you owe money. Even if you can only pay a pittance of what you owe, making those payments on a regular basis will help to re-establish a degree of trust in your commitment to keeping your promises to them.
Start building new credit relationships. Depending upon how badly your finances have been hit, look for opportunities to build a new, positive credit history. Start small, perhaps by opening low-cap accounts with local merchants, and paying those off on time or, even better, ahead of time. Credit score reporting company Equifax offers good advice on how to build those relationships.
Know your options if you’ve completed bankruptcy. Once the Insolvency Service has documented that your bankruptcy has been discharged, the record of your previous debts will remain on record for five years, but will indicate no outstanding balance. The absence of outstanding debts, in conjunction with a positive report from the new accounts you have established, can go a long way toward convincing other lending agencies that you are credit-trustworthy. Another credit reporting agency, Experian, has a short, easily understood handbook to help you better understand bankruptcy and its effects upon your current and future credit standing.
Get help building that new and better credit history. If you are having no luck finding lenders or merchants who are willing to extend you credit, you might consider asking a family member or close friend to stand as guarantor for a loan or line of credit with a merchant or bank. By cosigning a credit agreement, the other person agrees to assume responsibility for repayment. Obviously, you do not want to renege on such a guaranteed account, as you will not only cause further harm to your own credit standing, but will inevitably create friction with the individual who placed their trust in you.
Seek out creative, non-traditional lenders. Don’t be too surprised if the banks, card issuers, and merchants whom you initially approached remain unwilling to extend you credit. They, too, have been hit hard by the financial crisis and have become much more circumspect in deciding whom to entrust with their funds. In response to this trend, there has arisen a new industry whose focus is upon providing credit to those who are otherwise unable to obtain approval at traditional lenders. The interest charges and fees associated with such non-traditional lenders are somewhat higher than those charged by banks, which is understandable since they are assuming a greater risk of non-payment than their more conservative counterparts.
It may take some time to restore lenders’ faith in you to the point where you can avail yourself of low-interest loans, or large loans for major purchases such as a mortgage on a house, a car loan, or a business loan. But by being diligent in your efforts to rebuild your credit history, you have an opportunity to ultimately emerge in better financial condition than you enjoyed before the crisis. Be patient and follow the rules, and your financial woes can one day be little more than a shadow of an unpleasant memory.