Getting Back on Your Feet
Once you start resolving your financial problems, it is important to make future choices to avoid renewing your past problems. The following information should help you think about your financial life and your use of credit once your current debt problems are resolved.
Resolving your debt problems have taught you the importance of making and sticking to a budget. Pulling yourself out of a debt crisis should not be your final goal. Do not throw out your budget plan simply because you are no longer in dire straits. If your financial situation has improved, it is appropriate to reexamine your budget.
When faced with a financial crisis, you learned what your family can do without. In reexamining your budget, keep in mind what your family's needs are. Here are some items to consider:
- Can you start saving? Saving is an important part of getting back on your feet. Your savings account can help to protect you against new financial problems if they arise.
- Do you have deferred home maintenance or other necessities which should be viewed as priorities now that your crisis has passed?
- Did you cut back in areas like auto maintenance that require special attention in order to prevent future problems?
- Do you have low priority debts that you want to address?
- Did you reduce or eliminate contributions to a retirement plan, or borrow against that plan. Do you need to resume contributions or repay a retirement plan loan in order to provide for a stable retirement?
- Did you reduce insurance or medical coverages to save money temporarily? Is it necessary to restore the original coverages?
You are likely to continue to get offers for credit cards despite your recent financial problems. While access to some credit can be necessary, you want to avoid getting back in over your head. Here are some questions you should answer:
- Have you reduced your reliance on credit card spending? Can you start to pay your balance in full each month to avoid new problems?
- Do you have the cheapest available credit card? Do you understand all of its terms? For information on choosing a credit card and credit cards offering lower rates,click here.
- Have you checked your credit limits recently to make sure that you don't have more than you need? Are you avoiding making minimum payments which run up the balances?
- Have you resolved any disputes you have about how much is due?
- Are you unnecessarily using a secured credit card when you can obtain an unsecured card at a cheaper rate?
For more information on Credit Cards.
To make sure that you can keep your home for the long term, here are some things you should consider:
- If you have caught up on home mortgage payments, have you reviewed your recent bills to make sure that your mortgage company thinks you are caught up as well? Has the lender properly credited all payments? Have all court cases related to foreclosure been dropped (if applicable)?
- Is your current savings plan sufficient to protect you if urgent home repair needs arise in the future? Is your savings sufficient to help you get through any new period of financial difficulties?
- If you find that you are continuing to struggle financially, have you thought about moving to a cheaper residence? Would it relieve pressure for your family if you spend less on housing?
- Have you shopped around for home insurance at the best possible rate? Have you applied for any real estate tax abatement you may be entitled to?
- Have you received a larger than expected escrow payment increase from your mortgage company? (If you are caught up on back payments, this may be in error. Some mortgage companies are careless about escrow accounting. If you can/t get the issue resolved quickly, you may want to see a lawyer.)
- Are you continuing to make your housing payment your highest priority after food, necessary transportation, and essential medical needs?
If you have had credit problems, there are likely to be some things on your credit report which won't easily go away. However, there are some things you can do which may make things easier for you in the future:
- Have you checked your credit report to make sure it is accurate? Although there may be many things on your credit report which you can do little about, you may have legal remedies under the Fair Credit Reporting Act if there are errors. Information on Fair Credit Reporting Act.
- Have you resolved any disputes about your credit report or sent the reporting agencies an explanatory letter to include when it distributes your report? Information on credit agency disputes.
- Are you establishing better credit habits which will show new creditors that you are responsible? Have you tried borrowing a small amount of money and repaying it immediately to show potential lenders that you can manage your debts?
- Have you canceled unnecessary credit cards and lines of credit which may make new creditors concerned about your potential to become overextended?
- Are you still shopping around for credit for fair terms? (If not, you may be making a mistake. Don't assume that because one creditor tells you that you are a poor credit risk, others will tell you that as well.) For more information see Shopping for Credit.
- When you apply for credit for big ticket items like a home or car, are you providing a good explanation of your financial problems together with evidence showing that they have been resolved.
- Are you worrying about your credit record unnecessarily? Having resolved your financial problems, can you make a decision to reduce your reliance on credit for several years so that you don't have the pressure of new difficulties?
Consumer scams are often targeted against people that have had recent credit problems. A company may get your name from bankruptcy court records, foreclosure records, or by buying lists from debt collectors. Some of these companies assume that you will be desperate enough to make bad decisions about credit. Here are some scams to avoid:
- Paying for Credit Repair. No credit repair agency can clean up your credit record if you have been behind on many debts. Promises to do so are lies designed to get you to pay for something that can't really help you. Self-help strategies are much more likely to help you get back on your feet. Information on Credit Repair Scams.
- Making High-Rate Loans to Tide You Over. Some lenders offer high-rate loans to help you get back into the market for credit. The worst of these are high interest rate loans secured by your home. These lenders are counting on your belief that you cannot get credit on better terms elsewhere. They also may make false promises that the rate can be reduced if you establish a year or more of timely payments.
- Don't Accept That You Are a "Sub-prime" Borrower. You should always shop around rather than accept a higher than normal rate loan. You may have perfectly good credit in the eyes of another lender. Even if you are considered a high risk "sub-prime" borrower by every other lender you have contacted. There are many types of sup-prime loans. Shop the different sub-prime loans until you find a reasonable rate and reasonable terms.
- Loan brokers. If you are using a loan broker, make sure the broker is working to find you the best possible rate. Rather than a high-rate loan which could pay them a higher commission. Brokers that advertise to people with a history of financial problems are most likely to offer the higher rate loans. See our Web Site: Third Party Loan/Mortgage Brokers.
- Beware of Companies That Advertise "no credit check" or "bad credit no problem." These companies are either loan brokers or lenders that are looking for borrowers that consider themselves too risky to pass a credit check. Many offers for credit with up-front fees are scams. Information on Fraud and Scams.
The first hurdle for many people coming out of a financial crisis is to get over feeling ashamed about past problems. The reality is that nearly everyone in this country experiences some type of financial difficulties at one time or another. It is nothing to be embarrassed about. It is important to be up-front with new creditors or lenders and not be afraid to acknowledge that you have had problems. Emphasize that you are back on your feet and financially stable.
Feelings of embarrassment might cause you to try to wipe the slate clean too quickly. This can be a mistake. It is important to realize that even though not all past problems can be erased or covered up, most creditors and lenders understand that people fall on hard times and are usually willing to help you if you can prove that you are no longer facing financial problems.
Don't be too eager to take on substantial new debt. The most critical step in rebuilding is not necessarily the number of new credit cards that you have, but rather evidence of your ongoing ability to repay loans or credit. The worst thing you can do for your credit record is to take on too much new credit too soon and fail a second time.
You should focus on stabilizing your income and keeping your debt burden low. Creditors know that virtually all delinquencies occur because consumers are unable to pay their debts and not because they are trying to avoid legitimate obligations. Many creditors will be more concerned about whether you have the present and future ability to repay a debt than about your past problems.
Note: The links on this page that go to web sites outside of this agency's control are provided as a convenience only. The Department takes no responsibility for their content.