CHAPTER 11
Saving Your Financial Life
There has been a lot of doom and gloom in this book, out of necessity. I have had to talk about things you might not have known about, but that affect you nonetheless. Worse still, I may have put words before you revealing truths you already knew but were afraid to confront. If that’s the case, you are not alone.
Let me say it again: You are not alone.
In the United States, the most prosperous country in the world and perhaps in history, we face a paradox. We are largely a financially illiterate population. So many people fail financially every year, and for many reasons. Most common among these are larger systemic failures in our families and schools. As a country, we do not educate our children and students in financial matters. Many kids coming out of high school do not know anything about checking accounts, credit cards, or financial planning. If they know anything, it is that when they go away to college, Dad and Mom are going to give them their own credit card. Cool.
There is little value in assigning blame. It’s bad enough when someone’s credit is destroyed, when they marry the wrong person, or when they go through divorce, foreclosure, or bankruptcy. To blame someone else is a way of avoiding responsibility, but to blame yourself is equally nonproductive. The point is: Now you need to change how things were in the past. You need to rebuild your credit, fix the problems and habits that contributed to the problem, and begin all over with a new perspective on money and credit.
If you are to have any chance for a successful future, you do need to take a harsh and realistic look at the habits of the past. In previous chapters I have shown you the questions you need to ask and the steps you have to take to (a) avoid problems before they hit you, (b) mitigate the loss from what’s happening right now, and (c) prevent those problems from recurring in the future. You don’t get a recovering alcoholic a job as a bartender, and you don’t expect a recovering gambler to work in a casino. These people have to avoid temptation as part of their recovery process. By the same argument, you are going to need to change the habits that led to past problems.
If one of your problems was abusing credit cards, it doesn’t really help you to shun using credit cards forever, but it does make sense to set new rules for yourself. For example, your rules may include:
• Any use of a credit card is going to be limited to what I can afford to pay off every month.
• No balances will be carried forward except emergencies. In the event of an emergency, I will immediately stop using my credit card until its balance is paid down to zero, even if that means tightening my budget drastically.
• Even when I get attractive offers, I will not take low-interest transfers on my cards for any purpose. I acknowledge that credit cards are not meant for this. No longer will I believe that “a penny borrowed is a penny earned.” Now I know that “a penny borrowed compounds to a dollar owed.”
• I limit my credit cards to two or three at the most, and will not apply for more credit even when the offers are enticing. Those six months no-interest offers have a way of ruining my budget, so my new mantra is “no thank you.”
Starting Over
You have probably heard it said that you don’t begin recovering until you have hit bottom. I sincerely hope this is not necessary for you. If you have gone through complete destruction of your credit and lost your marriage as a result, had your home foreclosed, and see no recovery in sight, you have a long road before you. But if you are still in the middle of the cycle of financial despair, it can be much easier to recover.
In either case, you need to simply start over. Don’t dwell on the idea of failure, because that is self-destructive. That voice inside your head can be crueler than the worst critic you will meet elsewhere, but it is important to put it all aside and ignore that negative voice. This isn’t just hype about feeling good about yourself; it’s more about being a grown-up and making a courageous decision today to take a new path in your life and clean up whatever financial mess you may be experiencing.
You need to develop a specific action plan. It includes at least three major points:
1. Reestablish and rebuild your credit. This is always the essential first step. No matter what negative items are on your report, the sooner you begin to repair the problem, the sooner the date arrives when those items will be deleted from your report. As part of this, you need to immediately fix the problems that remain. If you have outstanding accounts in arrears, you have to get them caught up. If you have to negotiate with your credit providers to suspend interest, you need to take that step right away.
Another step is to begin a new credit history from today, which is “day one” in the process. Even if you can no longer qualify for the usual type of credit card, you can get a small-balance secured credit card. These are secured by a fund you keep in a savings account available to the credit card company. If you don’t make your payments, they can take those accounts over. These accounts are for anyone who cannot qualify otherwise, but keeping them open for the next year starts establishing a better record. Of course, you must make all payments on time. So it helps rebuild your credit to set up a secured credit card and use it regularly. This demonstrates that you are capable of managing credit.
Set up secured bank loans, if you can. These are practically no-risk for the lender. The usual method involves putting a savings account up as security, meaning you cannot use those funds. The account is put aside to protect the bank. Again, you must make all of your payments on time. This can be a one-year loan with monthly payments, which—like secured credit cards—proves that you can plan ahead and make scheduled payments on time. But remember, there can be no excuses. Even one late payment subverts the plan. You must consistently make your payments on time, or you will just be starting over again next year.
If you do not want to use a savings account, you can set up a secured loan and pledge a certificate of deposit(CD), as security. That accomplishes the same outcome, but you will need to make your payments on time just as you do with secured credit cards or bank accounts.
You also rebuild your credit by continuing to make your house payments on time if you are obligated under a mortgage. In addition, you should remain current on all existing credit cards and revolving credit debts. Pay off as much of your debt as you can, and do not be late with any payments. If this requires you to take a second job working nights and weekends, you have to be willing to make that commitment until you are in control. I do not believe in cutting up all of your credit cards and living your life debt-free. That is not realistic. I do believe in establishing and maintaining a realistic and manageable level of credit. Remember, regardless of which of these types of accounts you decide to use to rebuild your credit, it’s imperative that you confirm, up front, that the creditor reports to all three credit bureaus. If you obtain a secured card with a creditor that doesn’t report, it does nothing to re-establish your credit profile or your credit scores.
2. Maintain your recovery plan, understanding how long it takes to recover. You cannot completely recover in only a few months. You need to make a long-term commitment to this process, but it is not a quick fix. If anyone tells you that for a fee they can quickly repair your credit, it is simply not true.
It takes at least two years after a Chapter 7 bankruptcy before you can see much improvement in your credit score, and this will occur only if you take steps to rebuild without any further mishaps. Also, avoid inquiries and ensure that your balance to credit line ratios remain as low as possible. For Chapter 13 bankruptcy, credit scores should begin to improve as soon as the discharge process is completed. Overall, bankruptcy will remain on your credit report for 10 years.
After foreclosure, do not expect to see any improvement in your credit score for at least three years from the date the bank sells the foreclosed home. You will need to wait the full three years before applying for a new mortgage.
3. Look at the situation through a lender’s eyes. If you look at your situation from a lender’s point of view, you gain insights into why past due payments after bankruptcy are often treated as the kiss of death. Your fresh start is a second chance in every respect, so if you fail to keep your obligations up to date, why should you be given a third chance?
That’s the simple reality. Once you have begun your recovery from poor credit, bankruptcy, or foreclosure, remember that in a very real sense, a second chance is also your last chance. Don’t despair if your credit is in terrible shape; once you begin the process it will improve gradually over several years. The most recent 12 months are the most important, which means that as long as you keep everything up to date, the negative items from your past begin to fade in importance and impact. Make sure that you have at the very minimum 12 months of perfect pay history before you apply for any new credit.
Also remember that when you have maxed out a line of credit and are at capacity for a card, that is a big red flag, a sign that you are overextended. This is the guideline you need to follow: Only use your card to the extent that you can afford to pay off the entire balance every month (except for emergencies, of course). Make those payments on time, and value the line of credit as a form of financial freedom. But only use the amount you can afford.
One Day at a Time—Maintaining Financial Health
To establish increasingly good credit scores, you need to maintain your situation diligently. This is a process you must execute one day at a time. Financial health is like physical health. It requires preventive measures, periodic checkups, and immediate action when problems are discovered.
To maintain your financial health, remember these four guidelines:
1. Subscribe to a credit-monitoring service and keep it indefinitely. You must know what is going on with your credit score on a recurring basis. When you are in the process of repairing your credit, you cannot afford to wait a year before ordering a report. You need to be alerted any time something changes on your report. This not only keeps you in touch, but also prevents identity theft or errors.
2. Never become complacent. You cannot just repair your credit score and then fall back on old bad habits. You need to take steps to make sure that you learn all about credit, improve your money management habits, and honestly review the way you view credit. In the United States, where there is much financial illiteracy, many people simply don’t understand how credit works. This is aggravated by the bad example set by federal and state governments, which seem to always live beyond their means. If you expect to take control of your financial life and gain the financial freedom you want, you also need to educate yourself.
3. Remember that you are accountable (but you might need help). Set specific goals to pay down debts, close accounts, and radically change the way that you use credit. As you learn how to take control, you may need professional help: a qualified attorney, accountant, real estate agent, financial planner, and anyone else who can help will make the process easier. But ultimately you are the only one who can change your financial life.
4. Create a home office and formalize your money management process. Keep all of your bills and checks in one place, and set regular weekly hours when you are going to review and make payments as required. Appoint a family CFO—which usually stands for chief financial officer but is here extended to also mean credit and finance officer—to manage the process. More than anything else, a married couple needs to make sure they are on the same page and pursuing the same goals. If one of you is diligently paying off credit cards while the other is going to the mall and making purchases, you will never get out of trouble. This is a deal breaker. You both have to agree to communicate honestly and pledge to set financial goals you must reach. The CFO is responsible for taking the right steps (paying bills, reviewing budgets, communicating) to make sure the unified approach is maintained over a long period of time.
Controlling Your Financial Destiny
The processes you have to go through to repair your credit and to change your methods of operation are absolutely necessary in order for you to control your financial future. If you do not include radical change in your process, it’s not going to work.
Remember, this is a form of financial survival, not a debate over who is right or wrong. If a negative item on your credit report for a $50 dispute is affecting your credit, stop trying to be right, and just pay it off. Your credit score is much more important than winning an argument with a merchant, an ex-spouse, or anyone else. This is not about being right; it’s about doing the right thing.
You are also going to need to abandon any self-destructive attitudes or arguments. If you think you have been a victim and that is what led to your money problems, you might be right. But you can’t benefit from thinking like a victim. The past does not matter, and as long as you think of yourself as a victim, you are not going to be able to take control. Victims, by definition, are helpless. If you feel that way, you should get angry, right now. Stop feeling helpless, and take control of your own destiny. Never again should you wait for bad things to happen to you. From today forward, you have to take firm and decisive steps to ensure that no financial problems occur in the future. You are in command, not anyone else.
Just as bad as being a victim is feeling overwhelmed and helpless. Remember that credit scores reflect the present, but they change every day. No problem, no matter how severe, is insurmountable. Some credit problems take longer to repair, but there are no credit issues that cannot be fixed. Anything is possible, and that’s the most promising and exciting point I can tell you.
Stories of Success
Some of the real-life stories I’ve provided in past chapters were depressing or discouraging. This was necessary to drive home the point about how serious problems are, especially when no steps are taken to prevent or to fix them. But now I want to end with two inspiring true stories about people who recovered from bad experiences, and who changed their lives by taking the right steps.
Story #1: Trust but First, Verify
In an earlier chapter, I went through the importance of checking a prospective spouse’s credit history before getting married. That’s a good example of how you can avoid failure with a little homework. I got a letter from one of my radio listeners that made this point:
Rodney,
I know that education is your passion, and there are so many people coming to you for help, it ’s impossible to remember everyone. I wanted to take a minute to thank you for opening my eyes and saving me from making a very big mistake. I had just become engaged to be married, and was excited about making wedding plans and starting our lives together. I think God was looking out for me, though, because I was listening to your radio show one morning, and a light clicked on for me.
I heard you talking about how important it is to know not only your own credit, but also to know the credit of the person you’re marrying before tying the knot. I felt like you were talking to me, and when the lady gave the date of the credit workshop, I wrote it down, not knowing if I’d really go, but just in case. I dragged my fiancé along, although he didn’t really see the point.
During the presentation, you specifically said to pull both credit reports and look at them together before getting married. I wondered why my fiancé was opposed to doing this (he said it didn’t matter—we were marrying for love, not credit), but I insisted. Well, I found out why he didn’t want me to pull it. Although he had told me that he’d never been married and had no children, there was a child support judgment on his credit from the State of Georgia. He denied it at first, and I really wanted to believe him. But when I did some more digging, I found out that not only had he been married before and had a seven-year-old child in Georgia, but that he had been arrested for credit card fraud.
My heart was broken, but I broke up with him and moved on—how could I possibly forgive those kind of lies? Thanks to your advice, I found out early and was able to save myself a lot of heartache later. He was not Mr. Right. He was Mr. Wrong, and I wouldn’t have known if I hadn’t turned your show on that morning.
She was one of the lucky ones who found out what she needed to know before moving ahead in blind love. So many others have made the mistake of marrying the wrong person, or having someone destroy their credit, or simply spending more than they could afford. If any of these things have happened to you, don’t lose hope. You can recover.
Story # 2: It Doesn’t Help to Avoid the Problem
I heard from a client who could have avoided a lot of grief if she had only paid for a subscription to a credit monitoring service early on. She wrote to me:
Dear Rodney,
My husband and I moved to Dallas from Arizona in 2007. We didn’t know the area very well, so decided to rent for awhile so that we could research schools for our daughter and decide on a neighborhood. The house we chose was very nice, but we found out quickly that it wasn’t the area for us. There were people out in the street at all hours of the night, and we actually heard gunfire on the weekends—come to find out, there were gangs in the area. I was terrified. I have never been a paranoid person, but couldn’t relax in that house. My little girl was only six, and even though the school was only three blocks away, we were afraid to let her walk even that far.
We decided we needed to move, and someone at my husband’s office said we should call you. I was really nervous about our credit, but we had to find a better place to live. When I called your office, the lady who pulled our credit report told us that we couldn’t be approved because of some late payments and collections that had happened when my daughter was sick, and then when we relocated because my husband didn’t have a paycheck for over a month during that time. Instead of just telling us “no,” you and your staff listened to our story and began working with us to get our credit in order so that we could get approved to buy a house and get out of this rent house. I know it wasn’t easy.
We moved balances around to fix our capacity (we would never have even known what that was). You gave us the tools we needed to negotiate collection accounts and pay them off, but also to get them to remove the paid collections from our credit report! It took nine months of working together to make it happen, but it worked. I cried when the new credit was pulled, and we were approved! The home we bought is in a safe, quiet neighborhood. I’m so glad those days of gunfire and fear of going outdoors are over. In a world where people are just a credit score, you took the time to get to know us, gave us the direction and support we needed, and told us that “anything is possible.” I truly believe that you saved our family. Thank you!
Imagine how much easier this situation would have been had they only had a credit monitoring system in place to catch these issues before they became big problems. The monthly fee is a small investment to protect a valuable asset—your credit.
Having Good Credit Improves Your Quality of Life
Having good credit is one of the most important forms of freedom. In a country like the United States, where the concepts of freedom of speech, freedom of religion, and freedom of thought have become buzzwords for anything people want, many of us have lost sight of what freedom really means. If you have poor credit, you have no freedom. You cannot get more credit, qualify for the best mortgage rates, or even buy a home, and you might not even be able to get the job you want. Your credit score is your financial report card in a society based on quantified values and risks.
Think of improving your credit history as a method of bringing up your grade and winning more freedom in your future. After all, without freedom your life is one of restriction and limits. With freedom, anything is possible.
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