Sunday, October 26, 2014
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August Financial Fitness Challenge--Earn a Second Chance



We've all had do-overs. Whether you missed the Poli Sci 237 final after an unfortunate sushi experience, or flubbed the first road test for your driver's license, the chance to try again and to demonstrate a better outcome came in handy.

The economy has put many consumers in credit jeopardy for the first time in their lives. You might have a lifetime of financial stability behind you, but recent events could have you struggling to get out of a credit hole. Even if you've still got a job, there's been enough collateral damage in the economy—reduced income, medical bills, higher prices—to leave you on the ropes. The last thing you ever expected was to be struggling financially.

But now, late payments or partial payments, maybe even missed payments, result in a slipping credit score. Your balances are growing because you can't keep up with payments, and you might even be paying higher interest rates as a penalty for the slide. The good news is, because you have had such a good record, you're exactly the kind of person that lenders want to help.

And you are in good company. A Harris Interactive poll in April found that 62% of all respondents said they were at least somewhat concerned that their household income would not cover all their expenses.

The sad fact is, bad credit can happen to good people.

Don't wait to make your move

If you're new to budget woes, you might make the mistake of waiting too long to ask for help. You're used to being self-sufficient; it might not even occur to you to ask for help, or you might think you can get things back under control on your own and you won't have to risk exposing your situation. The longer you put it off, the more likely that you'll be past the point where help can make much difference.

Work with an ally you can trust, not someone who will only try to take advantage of your position.

The people at your credit union are especially ready to work with members to help them regain their financial footing. And while it's true that credit scoring and loan decisions have many automated features, the people at your credit union still are interested in hearing members' unique stories. Don't overlook that advantage.

Take these first steps:

  • Call the credit union and ask to speak to a credit counselor or a loan officer who works with members.

  • Explain that you're having trouble with your credit load and ask for an appointment, by phone or face to face, or for a referral to whatever credit counseling agency the credit union works with.

  • Be prepared to come clean about your situation. It won't help to describe the case as more dire than it is, and it will hurt you in the long run if you sugarcoat the situation.

Your best course is candid full disclosure. You won't shock or disappoint your credit counselor. He or she has heard it all, and understands. This discussion is strictly confidential. And your counselor is going to see if the facts as they appear in your credit records jibe with your account. If you try to save face by glossing over the story, you'll lose credibility and, quite possibly, the opportunity for that second chance.

Follow through on your appointment and with the plan that you and the credit counselor mutually create.

Focus on what works

The most realistic way to improve your credit score is to pay off debt, according to John Ulzheimer, frequent Home & Family Finance Radio guest and president of consumer education at SmartCredit.com, Costa Mesa, Calif. The score improvement is "practically immediate," showing up in less than 30 days, he says.

Ulzheimer modeled some payoff plans to see how they would affect a low credit score of 630. You might think that paying off your mortgage or a car loan will make a big impact on your credit score, but that's not the case.

Six of 10 consumers in one poll are concerned that their income will not cover their expenses.

In the scenarios, paying off a $250,000 mortgage improved a 630 score all of five points; the same was true for paying off a $35,000 car loan. The biggest improvement, from 630 to 665, came from paying off a $5,000 credit card balance.

Ulzheimer says, even if you can't pay off your cards entirely, "Your scores will still improve by paying [card debt] down as much as possible."

Skip some so-called remedies

Debt settlement is a big business. It makes money for providers but it's far less likely to help you. We reported about it in "Debt Settlement Sets a Costly Trap." What often happens is the consumer can't stick with the plan, and ends up in worse shape financially than at the beginning.

As the article points out, "The people at your credit union can recommend a debt-management agency if you need one; some credit unions even offer credit counseling and debt-management service."

You can protect yourself:

  • Negotiate credit debt by dealing with creditors directly—avoid the middle person and personally contact the issuer.
  • Don't wait until your debts have reached a crushing level.
  • Watch out for hefty up-front fees. The problem with advance payment is that the company has your money independent of the results it delivers.
  • Watch the time frame. If a company tells you the debt-settlement process will take four years or more, just say no—you'll likely be sued by your creditors during that time.

Another solution that can help—or hurt, depending on your follow-through—is loan consolidation. If you can qualify for this remedy, it might be ideal. But if you will only have trouble making those payments as well, you've made the situation worse.

The people at your credit union are interested in hearing your unique story.

That's why you're better off to talk through all options with your credit counselor. Determine together what solution is realistic and will work best for you. You'll be working with an ally you can trust, not someone who will only try to take advantage of your vulnerable position.

Financial Fitness Challenge

The people at your credit union are serious about helping you achieve and maintain financial health. They bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.

Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.

ST
Susan Tiffany, CCUFC
askem@cuna.coop



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