Many people face a financial crisis at some point in their lives.  But you can prevent your financial situation going from bad to worse by living within your means and taking the following steps to repair your credit.

Whether it is the result of a family illness, poor financial planning, or the loss of a job, sometimes it can feel like your finances are spiralling out of control.  If you ever had trouble paying your bills, or have had accounts turned over to debt collectors, you are not alone.

Develop a Budget

First, you are going to need to do a realistic assessment of your finances to determine how much money you take in and how much money you spend.  List all of your income sources followed by all of your fixed expenses like mortgage payments or rent, car payments, and insurance.

Next list all of your variable expenses like entertainment, clothing, and groceries.  The objective here is to make sure you can survive on the basics – food, shelter, transportation, health care and insurance.  Here’s an example of how we develop our family budget.

Contacting Your Creditors

You need to contact your creditors immediately if you are having trouble paying your bills.  If you are behind on your payments, most creditors will work with you on a debt management plan to help with credit repair and to put your account back in good standing.

Tell them why it’s difficult for you to pay your bills and work out a modified payment plan that reduces your monthly payments to a more manageable level.  The worst mistake you can make is to avoid paying your bills and speaking to your creditors.  They will send your delinquent account to a collection agency, and then there is no hope of repairing that relationship.

Create a Credit Repayment Plan

If you are struggling with credit card debt, student loans, or other bills you need to create a plan to ensure that at least your minimum payments are met.  From there you can tackle your debt a few different ways:

  • Highest interest rate first – using this strategy you would take your loan with the highest interest rate and direct all of your available funds towards paying this off as quickly as possible while maintaining just the minimum monthly payments on your other loans.  After you pay off this loan, rinse and repeat with your next highest interest rate loan until you have paid off all of your debt.
  • Lowest balance first – this strategy suggests you should direct all of your available funds towards paying off your loan with the lowest balance.  This has a positive psychological effect since you will reduce your total number of loans more quickly than just paying the highest balance or interest rate first.  Again, just rinse and repeat until all of your loans are paid off.

Consolidate Your Debt

Sometimes it can make sense to consolidate your debt into one loan at a lower interest rate to make your monthly payments more manageable.  If you have some equity in your home or access to a line of credit at a lower rate than your credit cards and other debts than you should look into consolidating your debt.

Just be cautious, especially with a home equity loan, as now you are securing more debt to your house and you do not want to default on these payments and lose your home.  And remember that even if you consolidate your loans into one, you still need a disciplined approach to repay it, otherwise you could find yourself in the same situation again down the road.

Repair Your Credit

Understanding how to repair your credit and how to fix it before it’s too late is not an impossible task.  Create a realistic budget, talk to your creditors, and create a plan to eliminate your debt on your own, or with a consolidation loan.

True, it can seem overwhelming at first, but if you stay disciplined and stick with your plan you can take control of your financial situation without fear of snowballing debt and angry bill collectors.


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