Last week, numerous web sites carried the news story, wrote blog posts, and print articles on the Urban Institute’s study that 35% of all Americans are delinquent on their debt and getting to know their debt collectors on a first name basis. If you live in the Dallas metropolitan area, the news is even worse.
Pamela Yip, the personal finance columnist for the Dallas Morning News, wrote in her column that 44.3% of North Texans with a credit file have debt reported to collections. The average amount of debt in collections, meaning it’s over 180 days past due, for Dallas area residents that are delinquent is $5,084. That’s excellent compared with the results of an Experian report released in May. Their study reported the average debt per consumer in the Dallas area is $28,240.
The impact of these numbers is staggering. More people are living paycheck to paycheck and would have a difficult time meeting their obligations if they were faced with a financial emergency such as a job loss or illness. This also means, people are paying more than they have to for home mortgages, car loans, revolving credit, and even their insurance.
Most insurance companies in Texas use credit to determine the premium rate for car, home, life, and even business policies. People with good credit will usually pay significantly less for their personal and business insurance than someone with fair or poor credit. The reason for this is credit has been statistically shown to predict future claim frequency, in addition to showing the insurance companies who will pay their bills on time or late.
There are a number of steps anyone can take to improve their credit rating, but it begins with ordering your free credit report from www.annualcreditreport.com. This can be ordered at no charge by anyone every 12 months, and it will pull data from each of the three major credit bureaus, Experian, TransUnion, and Equifax. It won’t give you your FICO score, you’ll have to pay for that, but it will show what’s on your report including any errors. Clean the errors up and your score will begin to improve.
What’s the total: Write down everything you owe to everyone such as mortgage or rent, car payments, credit cards, medical bills, etc. and then total it up. Knowing the total amount owed removes the fear of the unknown and empowers us to move toward financial health.
Pay off debt: There are two approaches to paying off debt; paying the smallest one off, then the next smallest, etc. (snowball), or paying the debt off with the highest interest rate, then the next highest, etc. Both ways work. Pick the one that’s right for you and start; today!
What’s the Balance: Being over the limit on any credit card hurts your credit score. Get each balance under the limit, even if it’s one creditor at a time. Pick the worst one and start there. Keep in mind, your FICO score is negatively impacted with any unpaid balance greater than 30% of its limit.
Schedule it: What time of the month are your bills due? If too many bills are due at the beginning of the month, see if you can schedule some of them to be due at the middle of the month. Many creditors will work with you on the due dates and this helps with cash flow which improves payment history.
Pay on time: Are your bills being paid on time or are they perpetually late? Pay them on time and your credit score improves!
Track spending: Most people don’t know what they spend each month on gas, eating out, Starbucks, etc. Record everything you spend your money on with a credit card, debit card, and cash for at least 30 days, preferably 90. This will help you to see what you’re spending!
Build a budget: Now that you know what you’re spending, create a budget that includes all your expenses and your net pay for each month. This is where you get to direct your money rather than it directing you! There are a number of excellent tools that help with this including Mint, Quicken, your online banking tools, and others.
Spend less: What items can you remove from your spending and apply to getting out of debt and then building wealth? Can you lower your cable bill, eat out less, take your lunch to work, skip the sale at Macy’s, or take advantage of Dart. Be creative! It’s now how much we make, but how much we keep that makes the difference.
While you’re at it, compare insurance. You may be surprised at what you can save!
Getting out of debt and building good credit is a lifestyle choice, similar to getting healthy. It takes time, but it can be done. I did it and I know you can too! Do you have a comment, question, or suggestion for our readers? Share them with us in the comments section of our blog or on our Google + and Facebook pages. I’d love to hear from you!